Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**x****     ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly periodended: September 30, 2010**

 

**o****        ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission file number 001-34216**

 

**TOREADOR RESOURCES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                     | ** ** | **75-0991164**                            |
|--------------------------------------------------|------------|-------------------------------------------|
| (State or other  jurisdiction

of incorporation) | ** ** | (I.R.S. Employer

Identification  Number) |

 

**c/o Toreador Holding SAS**

**9 rue Scribe**

**75009 Paris, France**

(Address of principal executive office)

 

Registrant’s telephone number, including areacode: **+33 1 47 03 34 24**

 

Indicateby check mark whether the Registrant (i) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required to filesuch reports), and (ii) has been subject to such filing requirements forthe past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 
| Large accelerated filer o                      | Accelerated filer x         |
|------------------------------------------------|-----------------------------|
|                                           |                        |
| Non-accelerated filer o                        | Smaller Reporting company o |
| (Do not check if a smaller reporting  company) |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o No x

 

As of November 8, 2010, there were25,828,705 shares of common stock, par value $.15625 per share, outstanding.

 

 

 

 

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Table of Contents

 

**TOREADOR RESOURCESCORPORATION**

 

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                                           | **Page** |
|------------|----------------------------------------------------------------------------------------------------------------------|----------|
|       | **PART I.  FINANCIAL INFORMATION**                                                                              |     |
|       |                                                                                                                 |     |
| Item  1.   | Financial  Statements (unaudited)                                                                                    |     |
|       |                                                                                                                 |     |
|       | Condensed  Consolidated Balance Sheets — September 30, 2010 and December 31,  2009                    | 1        |
|       |                                                                                                                 |     |
|       | Condensed  Consolidated Statements of Operations — for the three months ended  September 30, 2010 and 2009 | 2        |
|       |                                                                                                                 |     |
|       | Condensed  Consolidated Statements of Operations — for the nine months ended  September 30, 2010 and 2009  | 3        |
|       |                                                                                                                 |     |
|       | Condensed  Consolidated Statement of Changes in Stockholder’s Equity —  September 30, 2010            | 4        |
|       |                                                                                                                 |     |
|       | Condensed  Consolidated Statements of Cash Flows — for the nine months ended  September 30, 2010 and 2009  | 5        |
|       |                                                                                                                 |     |
|       | Notes  to Condensed Consolidated Financial Statements                                                                | 6        |
|       |                                                                                                                 |     |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 26       |
|       |                                                                                                                 |     |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 47       |
|       |                                                                                                                 |     |
| Item  4.   | Controls  and Procedures                                                                                             | 48       |
|       |                                                                                                                 |     |
|       | **PART II. OTHER  INFORMATION**                                                                                 |     |
|       |                                                                                                                 |     |
| Item 1.    | Legal  Proceedings                                                                                                   | 49       |
|       |                                                                                                                 |     |
| Item 1A.   | Risk Factors                                                                                                         | 49       |
|       |                                                                                                                 |     |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         | 49       |
|       |                                                                                                                 |     |
| Item 6.    | Exhibits                                                                                                             | 49       |
|       |                                                                                                                 |     |
|       | **SIGNATURES**                                                                                                       | 50       |

 

i

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Table of Contents

 

**PART I. FINANCIALINFORMATION**

 

**ITEM 1.     *FINANCIAL STATEMENTS (UNAUDITED)***

 

**TOREADOR RESOURCES CORPORATION**

 

**CONDENSEDCONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                               | ** ** | **September 30,**                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                               | ** ** | **2010**                                                                               | ** ** | **2009**              | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**                                                                        | ** ** | ** **            | ** ** |
| ** **                                                                                                               | ** ** | **(In thousands, except share and per share data)** | ** ** |
| **ASSETS**                                                                                                               |       |                                                                                   |       |                  |       |
| Current assets:                                                                                                          |       |                                                                                   |       |                  |       |
| Cash and cash equivalents (Note 2)                                                                                       |       | $                                                                                      | 53,550     |                  | $          | 8,712 |   |
| Accounts receivable (Note 2)                                                                                             |       | 3,388                                                                                  |       | 3,126                 |       |
| Income tax receivable (Note 8)                                                                                           |       | —                                                                                 |       | 245                   |       |
| Other                                                                                                                    |       | 3,762                                                                                  |       | 3,593                 |       |
| Total current assets                                                                                                     |       | 60,700                                                                                 |       | 15,676                |       |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| Oil and natural gas properties                                                                                           |       |                                                                                   |       |                  |       |
| Oil and natural gas properties, gross                                                                                    |       | 108,061                                                                                |       | 116,435               |       |
| Accumulated depletion, depreciation and  amortization                                                                    |       | (42,185                                                                                | )          | (41,814               | )          |
| Oil and natural gas properties, net                                                                                      |       | 65,876                                                                                 |       | 74,621                |       |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| Investments                                                                                                              |       | 200                                                                                    |       | 200                   |       |
| Goodwill                                                                                                                 |       | 3,764                                                                                  |       | 3,973                 |       |
| Other assets                                                                                                             |       | 1,738                                                                                  |       | 2,685                 |       |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| Total assets                                                                                                             |       | $                                                                                      | 132,278    |                  | $          | 97,155 |   |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                           | ** ** | ** **                                                                             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                     |       |                                                                                   |       |                  |       |
| Accounts payable and accrued liabilities                                                                                 |       | $                                                                                      | 6,888      |                  | $          | 11,635 |   |
| Deferred lease payable — current portion                                                                            |       | 112                                                                                    |       | 107                   |       |
| Derivatives (Note 13)                                                                                                    |       | 177                                                                                    |       | 886                   |       |
| Current portion of long-term debt (Note 5)                                                                               |       | 32,385                                                                                 |       | 32,385                |       |
| Income taxes payable (Note 8)                                                                                            |       | 6,303                                                                                  |       | —                |       |
| Total current liabilities                                                                                                |       | 45,865                                                                                 |       | 45,013                |       |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| Long-term accrued liabilities                                                                                            |       | 1,249                                                                                  |       | 1,241                 |       |
| Deferred lease payable, net of current portion                                                                           |       | 359                                                                                    |       | 442                   |       |
| Asset retirement obligations (Note 6)                                                                                    |       | 4,009                                                                                  |       | 6,733                 |       |
| Deferred income tax (Note 8)                                                                                             |       | 14,866                                                                                 |       | 15,358                |       |
| Long-term debt (Notes 5 and 14)                                                                                          |       | 34,716                                                                                 |       | 22,231                |       |
| Total liabilities                                                                                                        |       | 101,064                                                                                |       | 91,018                |       |
| Stockholders’ equity:                                                                                               |       |                                                                                   |       |                  |       |
| Common stock, $0.15625 par value, 30,000,000  shares authorized; 28,828,705 in 2010 and 22,106,955 in 2009 shares issued |       | 4,036                                                                                  |       | 3,454                 |       |
| Additional paid-in capital                                                                                               |       | 198,458                                                                                |       | 170,895               |       |
| Accumulated deficit                                                                                                      |       | (180,494                                                                               | )          | (176,578              | )          |
| Accumulated other comprehensive income                                                                                   |       | 11,748                                                                                 |       | 10,900                |       |
| Treasury stock at cost, 721,027 shares for 2009  and 2010                                                                |       | (2,534                                                                                 | )          | (2,534                | )          |
| Total stockholders’ equity                                                                                          |       | 31,214                                                                                 |       | 6,137                 |       |
|                                                                                                                     |       |                                                                                   |       |                  |       |
| Total liabilities and stockholders’ equity                                                                          |       | $                                                                                      | 132,278    |                  | $          | 97,155 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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** **

**TOREADOR RESOURCESCORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                                        | ** ** | **Three Months Ended**                                                       | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**                                                                 | ** ** |
| ** **                                                        | ** ** | **2010**                                                                               | ** ** | **2009** | ** ** |
| ** **                                                        | ** ** | **(Unaudited)**                                                                        | ** ** |
| ** **                                                        | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Revenues and other income:                                        |       |                                                                                   |       |   |   |
| Sales and other operating revenue                                 |       | $                                                                                      | 6,003      |   | $ | 5,204 |   |
| Other income                                                      |       | 560                                                                                    |       | — |   |
| Total revenues and other income                                   |       | 6,563                                                                                  |       | 5,204 |   |
| Operating  costs and expenses:                                    |       |                                                                                   |       |   |   |
| Lease operating expense                                           |       | 2,966                                                                                  |       | 1,468 |   |
| Exploration expense                                               |       | 201                                                                                    |       | 22 |   |
| Depreciation, depletion and amortization                          |       | 1,129                                                                                  |       | 1,266 |   |
| Accretion on discounted assets and liabilities  (Notes 5 and 6)   |       | (246                                                                                   | )          | 127 |   |
| General and administrative                                        |       | 1,773                                                                                  |       | 4,136 |   |
| Loss (gain) on oil and gas derivative contracts  (Note 13)        |       | 105                                                                                    |       | (7 | ) |
| Total operating costs and expenses                                |       | 5,928                                                                                  |       | 7,012 |   |
| Operating  income (loss)                                          |       | 635                                                                                    |       | (1,808 | ) |
| Other  (expense) income:                                          |       |                                                                                   |       |   |   |
| Foreign currency exchange gain (loss)                             |       | (1,178                                                                                 | )          | 1 |   |
| Interest expense, net of interest capitalized  (Note 5)           |       | (2,727                                                                                 | )          | (366 | ) |
| Total other income (expense)                                      |       | (3,905                                                                                 | )          | (365 | ) |
| Loss  before taxes from continuing operations                     |       | (3,270                                                                                 | )          | (2,173 | ) |
| Income  tax (benefit) provision (Note 8)                          |       | (666                                                                                   | )          | (232 | ) |
| Loss  from continuing operations, net of income taxes             |       | (2,604                                                                                 | )          | (1,941 | ) |
| Loss  from discontinued operations, net of income taxes (Note 12) |       | (290                                                                                   | )          | (10,518 | ) |
| Net loss available to common shares                               |       | $                                                                                      | (2,894     | ) | $ | (12,459 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Basic loss available to common shares per share:                  |       |                                                                                   |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                                                                      | (0.11      | ) | $ | (0.09 | ) |
| From discontinued operations, net of income taxes                 |       | (0.01                                                                                  | )          | (0.50 | ) |
|                                                              |       | $                                                                                      | (0.12      | ) | $ | (0.59 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Diluted loss available to common shares per share:                |       |                                                                                   |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                                                                      | (0.10      | ) | $ | (0.09 | ) |
| From continuing operations, net of income taxes                   |       | (0.01                                                                                  | )          | (0.50 | ) |
|                                                              |       | $                                                                                      | (0.11      | ) | $ | (0.59 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Weighted average shares outstanding:                              |       |                                                                                   |       |   |   |
| Basic                                                             |       | 24,660                                                                                 |       | 20,869 |   |
| Diluted                                                           |       | 25,917                                                                                 |       | 20,869 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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** **

**TOREADOR RESOURCESCORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                                        | ** ** | **Nine Months Ended**                                                        | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**                                                                 | ** ** |
| ** **                                                        | ** ** | **2010**                                                                               | ** ** | **2009** | ** ** |
| ** **                                                        | ** ** | **(Unaudited)**                                                                        | ** ** |
| ** **                                                        | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Revenues and other income:                                        |       |                                                                                   |       |   |   |
| Sales and other operating revenue                                 |       | $                                                                                      | 17,460     |   | $ | 13,096 |   |
| Other income (Note 16)                                            |       | 15,560                                                                                 |       | 121 |   |
| Total revenues and other income                                   |       | 33,020                                                                                 |       | 13,217 |   |
| Operating costs and expenses:                                     |       |                                                                                   |       |   |   |
| Lease operating expense                                           |       | 7,344                                                                                  |       | 5,029 |   |
| Exploration expense                                               |       | 1,276                                                                                  |       | 130 |   |
| Depreciation, depletion and amortization                          |       | 2,807                                                                                  |       | 4,171 |   |
| Accretion on discounted assets and liabilities  (Notes 5 and 6)   |       | (159                                                                                   | )          | 365 |   |
| General and administrative                                        |       | 9,615                                                                                  |       | 14,663 |   |
| Gain on oil and gas derivative contracts (Note 13)                |       | (709                                                                                   | )          | (7 | ) |
| Total operating costs and expenses                                |       | 20,174                                                                                 |       | 24,351 |   |
| Operating income (loss)                                           |       | 12,846                                                                                 |       | (11,134 | ) |
| Other (expense) income:                                           |       |                                                                                   |       |   |   |
| Foreign currency exchange gain (loss)                             |       | (1,254                                                                                 | )          | 131 |   |
| (Loss) gain on the early extinguishment of debt  (Note 5)         |       | (4,256                                                                                 | )          | 3,370 |   |
| Interest expense, net of interest capitalized                     |       | (4,448                                                                                 | )          | (1,833 | ) |
| Total other (expense) income                                      |       | (9,958                                                                                 | )          | 1,668 |   |
| Income (loss) before taxes from continuing  operations            |       | 2,888                                                                                  |       | (9,466 | ) |
| Income tax (benefit) provision (Note 8)                           |       | 5,683                                                                                  |       | (1,002 | ) |
| Loss from continuing operations, net of income  taxes             |       | (2,795                                                                                 | )          | (8,464 | ) |
| Loss from discontinued operations, net of income  taxes (Note 12) |       | (1,113                                                                                 | )          | (11,988 | ) |
| Net loss available to common shares                               |       | $                                                                                      | (3,908     | ) | $ | (20,452 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Basic loss available to common shares per share:                  |       |                                                                                   |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                                                                      | (0.12      | ) | $ | (0.41 | ) |
| From discontinued operations, net of income taxes                 |       | (0.05                                                                                  | )          | (0.59 | ) |
|                                                              |       | $                                                                                      | (0.17      | ) | $ | (1.00 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Diluted loss available to common shares per share:                |       |                                                                                   |       |   |   |
| From continuing operations, net of income taxes                   |       | $                                                                                      | (0.11      | ) | $ | (0.41 | ) |
| From continuing operations, net of income taxes                   |       | (0.04                                                                                  | )          | (0.59 | ) |
|                                                              |       | $                                                                                      | (0.15      | ) | $ | (1.00 | ) |
|                                                              |       |                                                                                   |       |   |   |
| Weighted average shares outstanding:                              |       |                                                                                   |       |   |   |
| Basic                                                             |       | 24,393                                                                                 |       | 20,428 |   |
| Diluted                                                           |       | 25,811                                                                                 |       | 20,428 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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**TOREADOR RESOURCESCORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 

NINE MONTHS ENDED SEPTEMBER 30, 2010

 

(UNAUDITED)

 
| ** **                                  | ** ** | **Common  Stock  (Shares)** | ** ** | **Common  Stock ($)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (loss)** | ** ** | **Treasury  Stock  (Shares)** | ** ** | **Treasury  Stock ($)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|---------------------------------------|------------|
| Balance at December 31, 2009           |       | 22,107                      |       | $                          | 3,454      |                             | $          | 170,895                  |       | $                                                         | (176,578   | )                             | $          | 10,900                       |       | 721                                   |       | $ | (2,534 | ) | $ | 6,137 |   |
| Exercise of stock options                   |       | 5                           |       | —                     |       | 15                               |       | —                   |       | —                                                    |       | —                        |       | —                       |       | 15                                    |       |
| Return of stock options exercised           |       | —                      |       | 1                          |       | —                           |       | —                   |       | —                                                    |       | —                        |       | —                       |       | 1                                     |       |
| Issuance of restricted stock                |       | 267                         |       | 42                         |       | (42                              | )          | —                   |       | —                                                    |       | —                        |       | —                       |       | —                                |       |
| Issuance of common stock                    |       | 3,450                       |       | 539                        |       | 28,786                           |       | —                   |       | —                                                    |       | —                        |       | —                       |       | 29,325                                |       |
| Amortization of deferred stock compensation |       | —                      |       | —                     |       | 1,370                            |       | —                   |       | —                                                    |       | —                        |       | —                       |       | 1,370                                 |       |
| Net loss                                    |       | —                      |       | —                     |       | —                           |       | (3,908                   | )          | —                                                    |       | —                        |       | —                       |       | (3,908                                | )          |
| Foreign currency translation adjustment     |       | —                      |       | —                     |       | —                           |       | —                   |       | 848                                                       |       | —                        |       | —                       |       | 848                                   |       |
| Tax effect of restricted stock              |       | —                      |       | —                     |       | (87                              | )          | —                   |       | —                                                    |       | —                        |       | —                       |       | (87                                   | )          |
| Payment of equity issuance costs            |       | —                      |       | —                     |       | (2,489                           | )          | —                   |       | —                                                    |       | —                        |       | —                       |       | (2,489                                | )          |
| Other                                       |       | —                      |       | —                     |       | 10                               |       | (8                       | )          | —                                                    |       | —                        |       | —                       |       | 2                                     |       |
|                                        |       |                        |       |                       |       |                             |       |                     |       |                                                      |       |                          |       |                         |       |                                  |       |
| Balance at September 30, 2010          |       | 25,829                      |       | $                          | 4,036      |                             | $          | 198,458                  |       | $                                                         | (180,494   | )                             | $          | 11,748                       |       | 721                                   |       | $ | (2,534 | ) | $ | 31,214 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**TOREADOR RESOURCESCORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                                                 | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                 | ** ** |
| ** **                                                                                 | ** ** | **(In thousands)**         | ** ** |
| Cash flows from operating activities:                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (3,908     | ) | $ | (20,452 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation, depletion and amortization                                                   |       | 2,807                           |       | 4,693 |   |
| Accretion on discounted assets and liabilities                                             |       | (159                            | )          | — |   |
| Amortization of deferred debt issuance costs                                               |       | 1,409                           |       | — |   |
| Stock based compensation                                                                   |       | 2,631                           |       | 3,909 |   |
| Deferred income taxes (liabilities) benefit                                                |       | (492                            | )          | 679 |   |
| Dry hole costs                                                                             |       |                            |       | 1,318 |   |
| Impairment of oil and natural gas properties                                               |       | —                          |       | 10,725 |   |
| Gain on sale of properties and equipment                                                   |       | —                          |       | (121 | ) |
| Gain on sale of discontinued operations                                                    |       | —                          |       | (1,675 | ) |
| Loss (gain) on early extinguishment of debt —  convertible notes                      |       | 4,256                           |       | (3,370 | ) |
| Loss on early extinguishment of debt — revolving  credit facility                     |       | —                          |       | 4,881 |   |
| Unrealized gain on commodity derivatives                                                   |       | (709                            | )          | — |   |
| Increase in accounts receivable                                                            |       | (262                            | )          | (1,677 | ) |
| Decrease in income taxes receivable                                                        |       | 245                             |       | — |   |
| Decrease (increase) in other current assets                                                |       | (169                            | )          | 8 |   |
| Decrease in other assets                                                                   |       | 652                             |       | 155 |   |
| Increase in other assets held for sale                                                     |       | —                          |       | (1,299 | ) |
| (Decrease) increase in accounts payable and  accrued liabilities                           |       | (4,747                          | )          | 1,080 |   |
| Decrease in deferred lease payable                                                         |       | (78                             | )          | — |   |
| Increase (decrease) in income taxes payable                                                |       | 6,303                           |       | (4,223 | ) |
| Decrease in liabilities held for sale                                                      |       | —                          |       | (5,797 | ) |
| Decrease in long-term accrued liabilities                                                  |       | 8                               |       | — |   |
| Net cash provided by (used in) operating  activities                                       |       | 7,787                           |       | (11,166 | ) |
| Cash flows from investing activities:                                                      |       |                            |       |   |   |
| Proceeds from sale of property and equipment                                               |       | —                          |       | 121 |   |
| Additions to property and equipment                                                        |       | (298                            | )          | (4,521 | ) |
| Proceeds from sale of oil and gas properties                                               |       | —                          |       | 60,418 |   |
| Net cash (used in) provided by investing  activities                                       |       | (298                            | )          | 56,018 |   |
| Cash flows from financing activities:                                                      |       |                            |       |   |   |
| Repayment of convertible notes                                                             |       | (22,231                         | )          | (12,661 | ) |
| Repayment of revolving credit facility                                                     |       | —                          |       | (36,372 | ) |
| Issuance of convertible notes                                                              |       | 31,631                          |       |   |   |
| Deferred debt issuance costs                                                               |       | (1,936                          | )          |   |   |
| Proceeds from issuance of common stock, net of equity  issuance costs of $2,489            |       | 26,837                          |       | (49 | ) |
| Proceeds from exercise of stock options                                                    |       | 15                              |       |   |   |
| Net cash provided by (used in) financing  activities                                       |       | 34,316                          |       | (49,082 | ) |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 41,805                          |       | (4,230 | ) |
| Effects of foreign currency translation on cash  and cash equivalents                      |       | 3,033                           |       | (4 | ) |
| Cash and cash equivalents, beginning of period                                             |       | 8,712                           |       | 14,860 |   |
| Cash and cash equivalents, end of period                                                   |       | $                               | 53,550     |   | $ | 10,626 |   |
| Supplemental disclosures:                                                                  |       |                            |       |   |   |
| Cash paid during the period for interest, net of  interest capitalized                     |       | $                               | 3,255      |   | $ | 1,669 |   |
| Cash paid during the period for income taxes                                               |       | $                               | 11         |   | $ | 4,032 |   |

 

The accompanying notes are an integral partof these financial statements.

 

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**TOREADOR RESOURCESCORPORATION**

 

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

(UNAUDITED)

 

**NOTE 1 - BASIS OF PRESENTATION**

 

Theconsolidated financial statements of Toreador Resources Corporation andsubsidiaries (“Toreador,” “we,” “us,” “our,” or the “Company”) included hereinhave been prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). They reflectall adjustments which are, in the opinion of management, necessary for a fairpresentation of the financial position and results of operations for theinterim periods, on a basis consistent with the annual audited financial statements.All such adjustments are of a normal recurring nature, unless noted herein.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to suchrules and regulations. However, the Company believes that the disclosurescontained herein are adequate to make the information presented not misleading.These interim financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009,which was filed with the SEC on March 16, 2010. The results of operationsfor interim periods are not necessarily indicative of the results to beexpected for the full year.

 

Weare a Delaware corporation that was incorporated in 1951. Our common stock istraded on the NASDAQ Global Market under the trading symbol TRGL. Our officesin the United States are located at 13760 Noel Road, Suite 1100, Dallas,TX, 75240-1383 (telephone number: (214) 559-3933). Our principal executiveoffices are located at c/o Toreador Holding SAS, 9 rue Scribe, 75009 Paris,France (telephone number: +33 1 47 03 34 24). Our website address iswww.toreador.net.

 

Unlessotherwise noted, amounts reported in tables are in thousands, except per unitdata.

 

Certainpreviously recorded amounts at December 31, 2009 have been reclassified toconform to this period presentation.

 

***RevenueRecognition***

 

OurFrench crude oil production accounts for substantially all of our sales. Wesell our French crude oil to Total Raffinage Marketing (“TOTAL”), and recognizethe related revenues when the production is delivered to TOTAL’s refinery,typically via truck. At the time of delivery to the plant, title to the crudeoil transfers to TOTAL. The terms of the contract with TOTAL state that theprice received for oil sold will be the arithmetic mean of all average dailyquotations of Dated Brent published in Platt’s Oil Market Wire for the month ofproduction less a specified differential per barrel. The pricing of oil salesis done on the first day of the month following the month of production. Inaccordance with the terms of the contract, payment is made within six workingdays of the date of issue of the invoice. The contract with TOTAL isautomatically extended for a period of one year unless either party cancels itin writing no later than six months prior to the beginning of the next year.

 

Taxesassociated with production are classified as lease operating expense.

 

Gainon sales of proved and unproved properties are only recognized when there is nouncertainty about the recovery of costs applicable to interests retained orwhere there is no substantial obligation for future performance by the Company.Losses on properties sold are recognized when incurred. Any gain or loss isreflected in “Other Income.”

 

***New Accounting Pronouncements***

 

InJanuary 2010, the FASB issued guidance that clarifies and requires newdisclosures about fair value measurements. The clarifications and requirementto disclose the amounts and reasons for significant transfers 

 

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betweenLevel 1 and Level 2, as well as significant transfers in and out of Level 3 ofthe fair value hierarchy, were adopted by the Company in the first quarter of2010. The new guidance also requires that purchases, sales, issuances, andsettlements be presented gross in the Level 3 reconciliation and thatrequirement is effective for fiscal years beginning after December 15,2010 and for interim periods within those years, with early adoption permitted.Adoption of the guidance which only amends the disclosure requirements did nothave significant impact on our financial statements.

 

InFebruary 2010, the FASB issued 2010-09, *Amendmentsto Certain Recognition and Disclosure Requirements (“ASU 2010-09”).*ASU 2010-09 amends ASC 855, *SubsequentEvents,* by removing the requirement for an SEC filer to disclose thedate through which subsequent events have been evaluated. Management’sresponsibility to evaluate subsequent events through the date of issuanceremains unchanged. The Company adopted amendments to the Codification resultingfrom ASU 2010-09 on February 24, 2010. As ASU 2010-09 relates specificallyto disclosures, the adoption of this standard had no impact on our condensedconsolidated financial condition, results of operations or cash flows.

 

OnJuly 21, 2010, the FASB issued ASU 2010-20, *Disclosure about the Credit Quality of Financing Receivables and theAllowance for Credit Losses* (“ASU 2010-20”). ASU 2010-20 amendsexisting disclosure guidance to require entities to provide extensive newdisclosures in their financial statements about their financing receivables,including credit risk exposures and the allowance for credit losses. ASU2010-20 is effective for fiscal and interim periods beginning afterDecember 15, 2010. The Company will review the requirements under thestandards to determine what impacts, if any, the adoption of the standard wouldhave on our condensed consolidated financial statements.

 

**NOTE 2 - CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE**

 

Financialinstruments that potentially subject us to a concentration of credit riskconsist principally of cash and cash equivalents, accounts receivable, and ourhedging and derivative financial instruments. We place our cash withhigh-credit quality financial institutions. We currently sell oil to onecustomer, TOTAL. Substantially all of our accounts receivable are due fromTOTAL, as purchaser of our oil production, and from our partner Hess Oil Francein connection with certain personal general and administrative costs associatedwith, and invoiced to Hess Oil France pursuant to, the investment agreementdated as of May 10, 2010. We place our hedging and derivative financialinstruments with financial institutions and other firms that we believe havehigh credit ratings.

 

Weperiodically review the collectability of accounts receivable and record anallowance for doubtful accounts on those amounts which are, in our judgment,unlikely to be collected. We have not had any significant credit losses in thepast and we believe our accounts receivable are fully collectable with theexception of the current allowance.

 

Accountsreceivable consisted of the following:

 
| ** **                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Oil and natural gas sales receivables |       | $                      | 2,130      |                  | $          | 2,055 |   |
| Recoverable VAT                       |       | 71                     |       | 636                   |       |
| Other accounts receivable             |       | 1,187                  |       | 436                   |       |
|                                  |       | $                      | 3,388      |                  | $          | 3,126 |   |

 

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**NOTE 3  — EARNINGS (LOSS) PERCOMMON SHARE**

 

The following table reconciles the numerators and denominators of thebasic and diluted earnings (loss) per common share computation:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** **  |
|----------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                     | ** ** | **September 30,**           | ** **  |
| ** **                                                     | ** ** | **2010**                         | ** **  | **2009** | ** ** |
| Basic loss per share:                                          |       |                             |        |   |   |
| Numerator:                                                     |       |                             |        |   |   |
| Loss from continuing operations, net of income tax             |       | $                                | (2,604      | ) | $ | (1,941 | ) |
| Loss from discontinued operations, net of income  tax          |       | (290                             | )           | (10,518 | ) |
| Net loss available to common shareholders                      |       | $                                | (2,894      | ) | $ | (12,459 | ) |
|                                                           |       |                             |        |   |   |
| Denominator:                                                   |       |                             |        |   |   |
| Weighted average common shares outstanding                     |       | 24,660                           |        | 20,869 |   |
|                                                           |       |                             |        |   |   |
| Basic loss available to common shareholders per  share from:   |       |                             |        |   |   |
| Continuing operations                                          |       | $                                | (0.11       | ) | $ | (0.09 | ) |
| Discontinued operations                                        |       | (0.01                            | )           | (0.50 | ) |
|                                                           |       | $                                | (0.12       | ) | $ | (0.59 | ) |
|                                                           |       |                             |        |   |   |
| Diluted loss per share:                                        |       |                             |        |   |   |
| Numerator:                                                     |       |                             |        |   |   |
| Loss from continuing operations, net of income tax             |       | $                                | (2,604      | ) | $ | (1,941 | ) |
| Loss from discontinued operations, net of income  tax          |       | (290                             | )           | (10,518 | ) |
| Net loss available to common shareholders                      |       | $                                | (2,894      | ) | $ | (12,459 | ) |
|                                                           |       |                             |        |   |   |
| Denominator:                                                   |       |                             |        |   |   |
| Weighted average common shares outstanding                     |       | 25,917                           |        | 20,869 |   |
| Conversion of notes payable                                    |       | —                           |  (1)   | — |  (1) |
| Diluted shares outstanding                                     |       | 25,917                           |        | 20,869 |   |
|                                                           |       |                             |        |   |   |
| Diluted loss available to common shareholders per  share from: |       |                             |        |   |   |
| Continuing operations                                          |       | $                                | (0.10       | ) | $ | (0.09 | ) |
| Discontinued operations                                        |       | (0.01                            | )           | (0.50 | ) |
|                                                           |       | $                                |  (0.11 | ) | $ | (0.59 | ) |

 

----

| (1) |   | Conversion of the Company’s 5.00% Convertible Senior Notes due 2025  would be anti-dilutive and the Company’s8.00%/7.00% Convertible Senior Notes due 2025 are not eligible for  conversion in 2010 (subject to certainterms and conditions under the Indenture dated as of  February 1, 2010), therefore there are no dilutive shares. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| ** **                                                     | ** ** | **Nine Months Ended** | ** **  |
|----------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                     | ** ** | **September 30,**          | ** **  |
| ** **                                                     | ** ** | **2010**                        | ** **  | **2009** | ** ** |
| Basic loss per share:                                          |       |                            |        |   |   |
| Numerator:                                                     |       |                            |        |   |   |
| Loss from continuing operations, net of income tax             |       | $                               | (2,795      | ) | $ | (8,464 | ) |
| Loss from discontinued operations, net of income  tax          |       | (1,113                          | )           | (11,988 | ) |
| Net loss available to common shareholders                      |       | $                               | (3,908      | ) | $ | (20,452 | ) |
|                                                           |       |                            |        |   |   |
| Denominator:                                                   |       |                            |        |   |   |
| Weighted average common shares outstanding                     |       | 24,393                          |        | 20,428 |   |
|                                                           |       |                            |        |   |   |
| Basic loss available to common shareholders per  share from:   |       |                            |        |   |   |
| Continuing operations                                          |       | $                               | (0.12       | ) | $ | (0.41 | ) |
| Discontinued operations                                        |       | (0.05                           | )           | (0.59 | ) |
|                                                           |       | $                               |  (0.17 | ) | $ | (1.00 | ) |
|                                                           |       |                            |        |   |   |
| Diluted loss per share:                                        |       |                            |        |   |   |
| Numerator:                                                     |       |                            |        |   |   |
| Loss from continuing operations, net of income tax             |       | $                               | (2,795      | ) | $ | (8,464 | ) |
| Loss from discontinued operations, net of income  tax          |       | (1,113                          | )           | (11,988 | ) |
| Net loss available to common shareholders                      |       | $                               | (3,908      | ) | $ | (20,452 | ) |
|                                                           |       |                            |        |   |   |
| Denominator:                                                   |       |                            |        |   |   |
| Weighted average common shares outstanding                     |       | 25,811                          |        | 20,428 |   |
| Conversion of notes payable                                    |       | —                          |  (1)   | — |  (1) |
| Diluted shares outstanding                                     |       | 25,811                          |        | 20,428 |   |
|                                                           |       |                            |        |   |   |
| Diluted loss available to common shareholders per  share from: |       |                            |        |   |   |
| Continuing operations                                          |       | $                               | (0.11       | ) | $ | (0.41 | ) |
| Discontinued operations                                        |       | (0.04                           | )           | (0.59 | ) |
|                                                           |       | $                               |  (0.15 | ) | $ | (1.00 | ) |

 

----

| (1) |   | Conversion of the 5.00% Convertible Senior Notes due 2025 would be  anti-dilutive and the 8.00%/7.00% Convertible SeniorNotes due 2025 are not eligible for conversion in 2010 (subject to  certain terms and conditions under the Indenturedated as of February 1, 2010), therefore there are no dilutive  shares. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**NOTE 4— COMPREHENSIVE INCOME (LOSS)**

 

Thefollowing table presents the components of comprehensive income (loss), net ofrelated tax:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss                                |       | $                                | (2,894     | )                               | $          | (12,459 | ) | $ | (3,908 | ) | $ | (20,452 | ) |
| Foreign currency translation adjustment |       | 7,300                            |       | (2,034                          | )          | 848 |   | (4,289 | ) |
| Comprehensive income (loss)             |       | $                                | 4,406      |                            | $          | (14,493 | ) | $ | (3,060 | ) | $ | (24,741 | ) |

 

**NOTE 5— LONG-TERM DEBT**

 

Long-termdebt consisted of the following:

 
| ** **               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Convertible senior notes |       | $                      | 67,101     |                  | $          | 54,616 |   |
|                     |       |                   |       |                  |       |
| Less: current portion    |       | (32,385                | )          | (32,385               | )          |
|                     |       |                   |       |                  |       |
| Total long-term debt     |       | $                      | 34,716     |                  | $          | 22,231 |   |

 

**Secured Revolving Facility with the International FinanceCorporation**

 

OnDecember 28, 2006, we entered into a loan and guarantee agreement withInternational Finance Corporation. The loan and guarantee agreement providedfor a $25 million facility which was a secured revolving facility with amaximum facility amount of $25 million which maximum facility amount would haveincreased to $40 million when the projected total borrowing base amount exceeds$50 million. The $25 million facility was funded on March 2, 2007. Theloan and guarantee agreement also provided for an unsecured $10 millionfacility which was funded on December 28, 2006.  Both the $25 millionfacility and the $10 million facility were to fund our operations in Turkey andRomania.

 

OnMarch 3, 2009, we repaid and retired the facilities with the InternationalFinance Corporation. The total amount of the payment was $36.4 million, whichcomprised $30 million principal, $5.9 million additional compensation due underthe credit facility as a result of our repayment (such additional compensationcalculated under the terms of the credit facility as a percentage of theCompany’s earnings before interest, tax, depreciation, amortization andexploration expense) and $500,000 for accrued interest and fees.  As aresult of the early extinguishment, we recorded a loss of $4.9 million for thenine months ended September 30, 2009, which was recorded in discontinuedoperations.

 

**5.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025**

 

OnSeptember 27, 2005, we issued $75 million of Convertible Senior Notes dueOctober 1, 2025 (the “5.00% Convertible Senior Notes”) to qualifiedinstitutional buyers pursuant to Rule 144A of the Securities Act of 1933,as amended (the “Securities Act”).

 

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TheCompany also granted the initial purchasers the option to purchase anadditional $11.25 million aggregate principal amount of 5.00% Convertible SeniorNotes to cover over-allotments. The over-allotment option was exercised onSeptember 30, 2005. The total principal amount of 5.00% Convertible SeniorNotes issued was $86.25 million and total net proceeds were approximately $82.2million. We incurred approximately $4.1 million of costs associated with the issuanceof the 5.00% Convertible Senior Notes; these costs have been recorded in otherassets on the balance sheet and are being amortized to interest expense usingthe straight-line interest rate method (which approximates the effectiveinterest method) over the term of the 5.00% Convertible Senior Notes (i.e.,from issuance to the earliest date on which holders may require the Company torepurchase all or a portion of their 5.00% Convertible Notes, in this case October 1,2010). See “Note 19 — Subsequent Events.”

 

Thenet proceeds were used for general corporate purposes, including funding aportion of the Company’s 2005 and 2006 exploration and development activities.

 

The5.00% Convertible Senior Notes bear interest at a rate of 5.00% per annum andcan be converted into common stock at an initial conversion rate of 23.3596shares of common stock per $1,000 principal amount of 5.00% Convertible SeniorNotes (equivalent to a conversion price of approximately $42.81 per share),subject to adjustment in the event of, among other things, a fundamental change(as defined in the indenture). We could have redeemed the 5.00% ConvertibleSenior Notes, in whole or in part, on or after October 6, 2008, and priorto October 1, 2010, for cash at a redemption price equal to 100% of theprincipal amount of 5.00% Convertible Senior Notes to be redeemed, plus anyaccrued and unpaid interest, if the closing price of our common stock exceeded130% of the conversion price over a specified period. On or afterOctober 1, 2010, we may redeem the 5.00% Convertible Senior Notes, inwhole or in part, at a redemption price equal to 100% of the principal amountof 5.00% Convertible Senior Notes to be redeemed, plus any accrued and unpaidinterest, irrespective of the price of our common stock. Holders may converttheir 5.00% Convertible Senior Notes at any time prior to the close of businesson the business day immediately preceding their stated maturity, and holdersmay, upon the occurrence of certain fundamental changes, or on October 1,2010, October 1, 2015, and October 1, 2020, require us to repurchaseall or a portion of their 5.00% Convertible Senior Notes for cash in an amountequal to 100% of the principal amount of such 5.00% Convertible Senior Notes,plus any accrued and unpaid interest. See “Note 19 — Subsequent Events.”

 

During2008 the Company repurchased $6 million, face value, of the 5.00% ConvertibleSenior Notes on the open market for $5.3 million. In 2009 the Companyrepurchased $25.7 million, face value, of the 5.00% Convertible Senior Notes onthe open market for $21.3 million, resulting in a gain on the earlyextinguishment of debt of $3.4 million after writing off deferred loan costs ofapproximately $1 million.  On February 1, 2010, Toreador consummatedan exchange transaction (the “Convertible Notes Exchange”). In the ConvertibleNotes Exchange, in exchange for (a) $22,231,000 principal amount of ouroutstanding 5.00% Convertible Senior Notes (the “Old Notes”) and (b) $9.4million cash, we issued $31,631,000 aggregate principal amount of our8.00%/7.00% Convertible Senior Notes, or the New Convertible Senior Notes, andpaid accrued and unpaid interest on the Old Notes.

 

Asthe debt instruments exchanged in the Convertible Notes Exchange havesubstantially different terms, the Company recognized the exchange of the 5.00%Convertible Senior Notes as extinguishment of debt. As a result, for the ninemonths ended September 30, 2010, the Company recognized a loss of $4.3million including write off of loan original fee of $822,000 for the debtextinguishment. The New Convertible Senior Notes are recorded at a fair valueof $35,065,000 on the date of exchange. The accretion expense on theConvertible Notes Exchange, which was determined using fair market value of theNew Convertible Senior Notes, will be amortized to income over their term. Theaccretion impact (positive) of $348,430 was recorded for the nine months ended September 30,2010.

 

Asof September 30, 2010, approximately $32.4 million principal aggregate amountof the 5.00% Convertible Senior Notes was outstanding.

 

OnOctober 1, 2010, the Company repurchased $32,256,000 principal amount ofthe 5.00% Convertible Senior Notes. See “Note 19 — Subsequent Events” forfurther information.

 

**8.00%/7.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025**

 

OnFebruary 1, 2010, Toreador consummated the Convertible Notes Exchange. Inthe Convertible Notes Exchange, in exchange for (a) the Old Notes and(b) $9.4 million cash, we issued $31,631,000 aggregate principal amount ofthe New Convertible Senior Notes and paid accrued and unpaid interest on theOld Notes.

 

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Weincurred approximately $1.9 million of costs associated with the issuance ofthe New Convertible Senior Notes; these costs have been recorded in otherassets on the balance sheets and are being amortized to interest expense usingthe straight-line interest rate method (which approximates the effective interestmethod) over the term of the New Convertible Senior Notes (i.e., from issuanceto the earliest date on which holders may require the Company to repurchase allor a portion of their New Convertible Senior Notes, in this case October 1,2013).

 

TheNew Convertible Senior Notes are senior unsecured obligations of the Company,ranking equal in right of payment with the Company’s 5.00% Convertible SeniorNotes and future unsubordinated indebtedness. The New Convertible Senior Noteswill mature on October 1, 2025 and pay annual cash interest at 8.00% fromFebruary 1, 2010 until January 31, 2011 and at 7.00% per annumthereafter. Interest on the New Convertible Senior Notes will be payable onFebruary 1 and August 1 of each year, beginning on August 1,2010.

 

TheNew Convertible Senior Notes are convertible prior to February 1, 2011only if an event of default occurs and is continuing under the terms of theindenture, upon a change of control (as defined in the indenture) and to theextent the Company elects to redeem the New Convertible Senior Notes in aProvisional Redemption (as defined below). The New Convertible Senior Notes areconvertible at any time on or after February 1, 2011 and before the closeof business on October 1, 2025.

 

TheNew Convertible Senior Notes are convertible into shares of our common stock atan initial conversion rate of 72.9927 shares of common stock per $1,000principal amount of New Convertible Senior Notes (which is equivalent to aninitial conversion price of $13.70 per share), subject to adjustment uponcertain events. Under the terms of the indenture governing the New ConvertibleSenior Notes, if on or before October 1, 2010, we sold shares of ourcommon stock in an equity offering or an equity-linked offering (other than forcompensation), for cash consideration per share such that 120% of the issuanceprice was less than the conversion price of the New Convertible Senior Notesthen in effect, the conversion price was to be reduced to an amount equal to120% of such offering price. As a result of our February 2010 publicoffering, the conversion rate of the New Convertible Senior Notes adjusted to98.0392 shares of common stock per $1,000 principal amount of New ConvertibleSenior Notes (which is equivalent to a conversion price of approximately $10.20per share).  Pursuant to the indenture, the conversion price of the NewConvertible Senior Notes will not be further adjusted under such provisionbecause the proceeds from the public offering were in excess of $20 million.

 

TheNew Convertible Senior Notes may be redeemed in whole or in part at the Company’soption prior to October 1, 2013, in cash at a redemption price equal toone hundred percent (100%) of the principal amount of the New ConvertibleSenior Notes redeemed, plus accrued and unpaid interest, if any, to, butexcluding, the redemption date plus a make-whole payment, if the closing saleprice of the Company’s common stock has exceeded 200% of the conversion pricethen in effect for at least twenty (20) trading days in any consecutive thirty(30)-trading day period ending on the trading day prior to the date of mailingof the relevant notice of redemption (a “Provisional Redemption”).  TheNew Convertible Senior Notes may be redeemed in whole or in part at the Company’soption on or after October 1, 2013 for cash at a redemption price equal to100% of the principal amount of the New Convertible Senior Notes redeemed, plusany accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of certain fundamental changes, or on each ofOctober 1, 2013, October 1, 2015 and October 1, 2020, a holdermay require the Company to repurchase all or a portion of the New ConvertibleSenior Notes in cash for 100% of the principal amount of the New ConvertibleSenior Notes to be purchased, plus any accrued and unpaid interest to, butexcluding, the purchase date.

 

Pursuantto the indenture, the Company and its subsidiaries may not incur debt otherthan Permitted Indebtedness. “Permitted Indebtedness” includes (i) the NewConvertible Senior Notes; (ii) the 5.00% Convertible Senior Notes or anyindebtedness of the Company that serves to refund or refinance the 5.00%Convertible Senior Notes (“Refinancing Debt”), so long as the principal amountof the Refinancing Debt does not exceed the outstanding principal amount of the5.00% Convertible Senior Notes; (iii) indebtedness incurred by the Companyor its subsidiaries not to exceed the sum of (i) the product of(x) $7.00 and (y) the number of barrels of proved plus probablereserves and (ii) cash equivalents less the aggregate principal amount ofthe New Convertible Senior Notes outstanding less the aggregate principalamount of the 5.00% Convertible Senior Notes less any Refinancing Debt;(iv) indebtedness that is nonrecourse to the Company or any of itssubsidiaries used to finance projects or acquisitions, joint ventures orpartnerships, including acquired indebtedness (“Nonrecourse Debt”); and(v) certain other customary categories of permitted debt. In addition, theCompany may not permit its total consolidated net debt as of any date to exceedthe product of (x) $7.00 and (y) the number of barrels of proved plusprobable reserves other than for Nonrecourse Debt. The proved plus probablereserves underlying any Nonrecourse Debt for which debt has been incurred aspermitted debt pursuant to clause (iv) above will be excluded from theproved plus probable reserves calculation for the purposes of the above debtcovenants.

 

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**CHANGE IN AMORTIZATION OF ISSUE PREMIUM AND DEBT ISSUANCECOSTS**

 

TheCompany reviews the estimated lives of its assets and liabilities and relatedamortization period on an ongoing basis. This review indicated that theestimated amortization period of the Company’s issue premium and debt issuancecosts were deemed to be shorter than the previously assigned amortizationperiod. As a result, effective July 1, 2010, the Company changed itsestimates for the amortization period of its issue premium and debt issuancecosts to reflect the first put option date of the related callable debt. Thischange in estimate resulted from a change in the pattern of recognition ofthose expenses resulting from the repurchase option for the 5.00% ConvertibleSenior Notes on October 1, 2010.

 

Basedon this early redemption, the Company has decided that for a debt instrumentthat is puttable by the holder prior to the debt’s stated maturity date, it ispreferable to amortize the related issuance costs and purchase premium over aperiod no longer than through the first put option date. The issue premium onthe Convertible Notes Exchange and the costs associated with the issuance ofits convertible senior notes will now be amortized using the straight-lineinterest rate method (which approximates the effective interest method) overthe term of the first puttable dates of these callable debts. In all priorperiods, the issue premium and the debt issuance costs were amortized over theterms of the debt issuance (i.e., October 1, 2025 for both the 5.00%Convertible Senior Notes and the New Convertible Senior Notes). The effect ofthis change in estimate was to increase the interest expense by $1,260,060,increase the accretion impact (positive) by $202,314 (or increase net loss for $1,057,746)and decrease basic and diluted earnings per share by $0.04 for the three monthsended September 30, 2010.

 

**NOTE 6 — ASSET RETIREMENT OBLIGATIONS**

 

Weaccount for our asset retirement obligations in accordance with ASC 410, “AssetRetirement and Environmental Obligations”, which requires us to record the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred. When the liability is initially recorded, the entitycapitalizes a cost by increasing the carrying amount of the related long-livedasset. Over time, the liability is accreted to its present value each period,and the capitalized cost is depreciated over the useful life of the relatedasset. Upon settlement of the liability, we either settle the obligation forits recorded amount or incur a gain or loss upon settlement.

 

Asof September 30, 2010, we updated our asset retirement obligations andassets based on the last reserve life estimates available to the Company. Theeffect of this change in estimate was to decrease our asset retirementobligation by $2,582,000 and decrease our asset retirement obligations assetsfor the same amount.

 

Thefollowing table summarizes the changes in our asset retirement liability duringthe nine months ended September 30, 2010 and for the year ended December 31,2009:

 
| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                            | ** ** | **2009**                               | ** ** |
| Asset retirement obligation at January 1         |       | $                                                   | 6,733      |                                   | $          | 6,037 |   |
| Asset retirement accretion expense                    |       | 189                                                 |       | 507                                    |       |
| Foreign currency exchange loss (gain)                 |       | (331                                                | )          | 189                                    |       |
| Change in reserve life estimate                       |       | (2,582                                              | )          | —                                 |       |
| Property dispositions                                 |       | —                                              |       | —                                 |       |
| Asset retirement obligation at the end of the  period |       | $                                                   | 4,009      |                                   | $          | 6,733 |   |

 

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** **

**NOTE 7 — GEOGRAPHIC OPERATING SEGMENT INFORMATION**

 

Wehave operations in only one industry segment, the oil and natural gasexploration and production industry. We are structured along geographicoperating segments or regions, and currently have operations in the UnitedStates and France and had operations in Hungary in 2009.

 

Thefollowing tables provide the geographic operating segment data required by ASC280, “Segment Reporting”.

 

**ThreeMonths Ended September 30, 2010**

 
| ** **                | ** ** | **United States** | ** ** | **France** | ** ** | **Total** | ** ** |   |   |
|---------------------------|------------|------------------------|------------|------------|------------|-----------|------------|--------|--------|
| Revenues and other income |       | $                      | 7          |       | $          | 6,556     |       | $      | 6,563  |   |   |   |
| Costs and expenses        |       | 1,825                  |       | 4,103      |       | 5,928     |       |   |   |
| Operating income (loss)   |       | $                      | (1,818     | )          | $          | 2,453     |       | $      | 635    |   |   |   |

 

**ThreeMonths Ended September 30, 2009**

** **
| ** **                | ** ** | **United States** | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
|---------------------------|------------|------------------------|------------|------------|------------|-------------|------------|-----------|------------|
| Revenues and other income |       | $                      | 63         |       | $          | 5,141       |       | $         | —     |   | $ | 5,204 |   |
| Costs and expenses        |       | 3,307                  |       | 3,705      |       | —      |       | 7,012     |       |
| Operating income (loss)   |       | $                      | (3,244     | )          | $          | 1,436       |       | $         | —     |   | $ | (1,808 | ) |

 

**Nine Months Ended September 30, 2010**

 
|                      |   | **United States** | ** ** | **France** | ** ** | **Total** |   |   |   |
|---------------------------|--------|------------------------|------------|------------|------------|-----------|--------|--------|--------|
| Revenues and other income |   | $                      | 16         |       | $          | 33,004    |   | $      | 33,020 |   |   |   |
| Costs and expenses        |   | 6,124                  |       | 14,050     |       | 20,174    |   |   |   |
| Operating income (loss)   |   | $                      | (6,108     | )          | $          | 18,954    |   | $      | 12,846 |   |   |   |

 

**Nine Months Ended September 30, 2009**

 
| ** **                | ** ** | **United States** | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
|---------------------------|------------|------------------------|------------|------------|------------|-------------|------------|-----------|------------|
| Revenues and other income |       | $                      | 338        |       | $          | 12,879      |       | $         | —     |   | $ | 13,217 |   |
| Costs and expenses        |       | 12,850                 |       | 11,501     |       | —      |       | 24,351    |       |
| Operating income (loss)   |       | $                      | (12,512    | )          | $          | 1,378       |       | $         | —     |   | $ | (11,134 | ) |

 
| ** **              | ** ** | **Total Assets (1)** |       |       |       |
|-------------------------|------------|--------------------------------|------------|------------|------------|
| ** **              | ** ** | **United States**         | ** ** | **France** | ** ** | ** ** | ** ** |   |   |
| ** **              | ** ** | **Continuing Operations** | ** ** | **Total**  |       |   |   |
| September 30, 2010 |       | $                              | 36,945     |       | $          | 95,333 |   | $ | 132,278 |   |   |   |
|                    |       |                           |       |       |       |   |   |   |   |
| December 31, 2009  |       | $                              | 6,552      |       | $          | 90,603 |   | $ | 97,155 |   |   |   |

 

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(1)           All intercompany accounts andtransactions are eliminated in consolidation.

** **

**NOTE 8 — INCOME TAXES AND DEFERRED INCOME TAXES**

 

We are subject to income taxes in the United Statesand France. The current provision for taxes on income consists primarily ofincome taxes based on the tax laws and rates of the two countries in whichoperations were conducted during the three month period ended September 30,2010. Deferred income taxes are determined under the liability method, based ondifferences between financial reporting and income tax basis of assets andliabilities and are measured using the enacted tax rates and laws. Themeasurement of deferred tax assets is adjusted by a valuation allowance, ifnecessary, to reduce the future tax benefits to the amount, based on availableevidence it is more likely than not deferred tax assets will be realized.

 

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AtSeptember 30, 2010, we recorded a $6.3 million income tax payable as weexpect to owe income tax within the next 12 months. The increase of taxprovision associated with French operations is mainly due to the $15 millionupfront payment received by TEF from Hess under the Investment Agreement (See “Note16 — Agreement with Hess”). For the nine months ended September 30, 2010and 2009 we paid income taxes of approximately $11,000 (with respect to incomeearned in 2009) and $4 million (with respect to income earned in 2008)respectively, related to French taxable income. The decrease in taxes paid in2010 as compared to 2009 is due to higher taxable income for French operationsin 2008. As of September 30, 2010, our French operations recorded a $5.8million tax provision, and the U.S. operations recorded a tax benefit of$87,012 which resulted in a consolidated tax payable of $5.7 million.

 

As of September 30,2010 and December 31, 2009, we recorded a $14.9 million and $15.4 million,respectively, deferred income taxes related to differences in oil and gasproperty capitalization and depletion methods.

 

Wehave adopted ASC 740 “Income Taxes”, formerly FIN No. 48, “Accounting forUncertainty in Income Taxes”, on January 1, 2007. There are no taxpositions for which a material change in the unrecognized tax benefit isreasonably possible in the next 12 months.

 

TheCompany recognizes potential accrued interest and penalties related tounrecognized tax benefits within its global operations in income tax expense.During the nine months ended September 30, 2010, the Company recognized nopotential interest and penalties associated with uncertain tax positions. Tothe extent interest and penalties are not assessed with respect to uncertaintax positions, amounts accrued will be reduced and reflected as a reduction ofthe overall income tax provision.

 

Inaddition to U.S. federal tax returns, we file several state and foreign taxreturns, many of which remain open for examination for five years**.**

** **

**NOTE 9 — CAPITAL**

 

Forthe nine months ended September 30, 2010, the Company issued 266,750shares of stock to employees and directors, of which 132,733 shares wereimmediately vested in accordance with the terms of the grants and 5,000 stockoptions were exercised under the terms of the option agreements.  Therewere no forfeitures of restricted stock and stock options for the nine monthsended September 30, 2010.

 

OnFebruary 12, 2010, we completed a registered underwritten public offeringof 3,450,000 shares of common stock, including 450,000 shares of common stockacquired by the underwriters from us to cover over-allotment options. The netproceeds to Toreador from the offering were approximately $26.8 million, afterdeducting underwriting discounts, commissions and estimated offering expenses.We intended to use the net proceeds, together with cash on hand, to satisfypayment obligations arising from the holders’ exercise, if any, of their righton October 1, 2010 to require the Company to repurchase its 5.00%Convertible Senior Notes and for general corporate purposes, which may includeworking capital, capital expenditures and acquisitions. Pending such use, weinvested the net proceeds in mutual and money market funds and/or bankcertificates of deposit. As of September 30, 2010, approximately $32.4million principal aggregate amount of the 5.00% Convertible Senior Notes wasoutstanding.  On October 1, 2010, the Company repurchased $32,256,000principal amount of the 5.00% Convertible Senior Notes.  See “Note 19 — Subsequent Events” for furtherinformation.

 

**NOTE 10 — CAPITALIZED INTEREST**

 

Wecapitalize interest on major projects that require an extended period of timeto complete. Capitalized interest for the three months ended September 30,2010 and 2009 was $0 and $118,000 respectively. Capitalized interest for thenine months ended September 30, 2010 and 2009 was $0 and $355,000,respectively.

 

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** **

**NOTE 11 — COMMITMENTS AND CONTINGENCIES**

 

In2005, two separate incidents occurred offshore Turkey in the Black Sea, whichresulted in the sinking of two caissons (the “Fallen Structures”) and the lossof three natural gas wells. The Company has not been requested to or ordered byany governmental or regulatory body to remove the caissons. Therefore, theCompany believes that the likelihood of receiving such a request or order isremote and no liability has been recorded. In connection with the Company’ssale of its 26.75% interest in the South Akcakoca Sub-Basin (“SASB”) to PetrolOfisi in March 2009 and its sale of Toreador Turkey Ltd. (“Toreador Turkey”)to Tiway Oil BV (“Tiway”) in October 2009, the Company agreed to indemnifyPetrol Ofisi and Tiway, respectively, against and in respect of any claims,liabilities and losses arising from the Fallen Structures. The Company has alsoagreed to indemnify a third-party vendor for any claims made related to theseincidents.

 

OnOctober 16, 2003, we entered into an agreement (the “Netherby Agreement”)with Phillip Hunnisett and Roy Barker (“Hunnisett and Barker”), pursuant towhich Hunnisett and Barker agreed to post the collateral required by theTurkish government for Madison Oil Turkey Inc. (a Liberian company laterreincorporated in the Cayman Islands as Toreador Turkey) (“Madison Oil”) toretain its 36.75% interest in relation to eight offshore exploration SASBlicenses in exchange for a 1.5% gross overriding royalty interest (the “OverridingRoyalty”) on the net value to Madison Oil of all future production, if any,deriving from Madison Oil’s interest in such SASB licenses. SinceMarch 2009, we have corresponded with Hunnisett and Barker regarding adispute over the amount of the compensation payable by us to Hunnisett and Barker under the NetherbyAgreement as a result of Toreador Turkey’s sale of a 26.75% interest in theSASB licenses to Petrol Ofisi in March 2009 (the “Netherby Payment Amount”).Hunnisett and Barker have contended that the Netherby Payment Amount could beup to $10.4 million; however, we do not believe that Hunnisett and Barker areentitled to such amount.

 

OnSeptember 30, 2009, we completed the sale of Toreador Turkey, includingwith it Toreador Turkey’s remaining 10% interest in the SASB license, to Tiway.In connection with this sale, we agreed to indemnify Tiway against and inrespect of any and all claims, liabilities, and losses arising from theOverriding Royalty.  TRC is treating thesaid indemnity as extending to claims against Tiway Turkey Ltd (previouslyTiway Turkey Ltd) as well.  As of September 30,2010, we had accrued approximately $880,000 (recorded under long-term accruedliabilities) as a contingent liability for these claims, and the expense oflegal cost of $106,000.  See “Note 12 —Discontinued Operations”.

 

Asof September 30, 2010, we also accrued $220,000 (recorded under accountspayable and accrued liabilities) as a provision for the 1.5% Overriding Royaltythe Company will have to pay on the net value to Hunnisett and Barker of allfuture production, if any, deriving from Madison Oil’s interest in such SASBlicenses.

 

OnSeptember 6, 2010, English High Court proceedings were commenced byHunnisett and Barker, as well as Netherby Investments Limited against TiwayTurkey Limited (previously Toreador Turkey Limited) and TRC. The proceedingswere served on TRC on October 20, 2010 but so far as TRC is aware have notyet been served on Tiway Turkey Limited. In the said proceedings, Hunnisett and Barker now argue that anagreement was reached between the parties around November 2008 regardingthe Netherby Payment Amount in the sum of $7.2 million. In addition they arguethat on a proper construction of the Netherby Agreement, they are entitled tocontinuing Overriding Royalty including on the 26.75% interest in the SASBlicenses that was sold to Petrol Ofisi in March 2009 and/or to acapitalized sum of “not less than” $7.2 million. In addition or in thealternative, Hunnisett and Barker raise a wholly new claim for rectification ofthe Netherby Agreement on the basis they claim it does not reflect the trueagreement of the parties. They seek rectification of the Netherby Agreement sothat upon a sale such as the sale of the 26.75% interest in the SASB licensesthat was sold to Petrol Ofisi in March 2009, the Netherby Agreementparties are required to first agree on a capitalized sum to be paid toHunnisett and Barker.  Hunnisett andBarker also seek costs and interest.  TheCompany does not believe that any agreement was ever reached entitlingHunnisett and Barker to the payment of the said sum of $7.2 million. TheCompany also does not agree with Hunnisett and Barker’s proposed constructionof the Netherby Agreement. We are currently considering the new claim forrectification with our legal advisers but we intend to vigorously defendourselves against any claim for payment of an amount in excess of the amount towhich we believe that Hunnisett and Barker are entitled.

 

OnJune 17, 2009, The Scowcroft Group, Inc. (“Scowcroft”) filed acomplaint in the U.S. District Court for the District of Columbia against us.The complaint alleged that we breached a contract (the “Scowcroft Contract”)between Scowcroft and us relating to the sale of our interests in the SASB andthat Scowcroft was entitled to a success fee thereunder as a result of the saleof our interests in the SASB to Petrol Ofisi in March 2009.

 

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Thecomplaint also alleged unjust enrichment/quantum meruit and fraud. Scowcroftsought damages in the amount of $2 million plus interest, costs and expenses.On April 30, 2010, Toreador and Scowcroft executed a settlement agreement(the “Settlement Agreement”), pursuant to which Toreador agreed to payScowcroft $495,000 and, subject to receipt of such payment, Scowcroft agreed totake actions to dismiss the suit and the parties agreed to a mutual releasewith respect to claims relating to the Scowcroft Contract.  On April 30,2010, Toreador made the settlement payment and the parties filed a stipulationof dismissal of the action. As of September 30, 2010, $657,000 has beenexpensed in discontinued operations consequently, consisting of thesettlement amount and associated legal costs.

 

OnJanuary 25, 2010, we received a claim notice from Tiway under the SharePurchase Agreement, dated September 30, 2009, among us, Tiway Oil AS andTiway relating to the sale of Toreador Turkey Ltd. (the “SPA”) in respect of athird-party claim asserted by Petrol Ofisi against Toreador Turkey Ltd. in theamount of TRY 7.6 million ($5.1 million), for which Tiway alleges we are liablefor an estimated TRY 2.1 million ($1.4 million). No formal legal evaluation canbe made at this time as to the extent of the Company’s liability, if any. On July 20, 2010, the Court appointed three experts to evaluate thecase.  A hearing was held on November 2,2010, at which the Court adjourned pending the issuance of the experts’ report.The next hearing is scheduled for on February 1, 2011.

 

OnOctober 6, 2010, Toreador received a claim notice from Tiway under the SPAin respect of an arbitration initiated by Türkiye Petrolleri A.O. (“TPAO”)against Tiway relating to alleged damages and losses suffered in connectionwith the Akçakoca-Çayağzi Pipeline Construction Project in 2005.  Tiway asserts in the letter that the totalrelief sought is $2,993,038. We believe the arbitration initiated by TPAO is withoutmerit.

 

ToreadorEnergy France SCS (“TEF”) executed on August 6, 2010 an indemnificationand guarantee agreement for a maximum aggregate amount of €50 million firstdemand guarantee to cover Lundin International (“Lundin”) against any claim bya third party arising from drilling works executed by TEF as operator on theMairy permit.  The title to the Mairypermit was awarded to Lundin, TEF and EnCore (E&P) Ltd jointly in August 2007.Earlier this year Lundin communicated its desire to withdraw from the permit onwhich no drilling works had been performed and consequently assigned itsworking interest of 40% in equal parts to TEF and EnCore (E&P) Ltd.  TEF subsequently assigned half of its now 50%working interest to Hess Oil France SAS by virtue of the InvestmentAgreement.  Under French mining law, alltitleholders are held jointly and severally responsible for all damages andclaims relating to works on a permit. Therefore, under the indemnification and guarantee agreement, TEF agreedto indemnify Lundin upon notice of any liability or claim for damages by athird party against Lundin in connection with works performed by TEF on theMairy permit from February 15, 2010 until the transfer of title of suchpermit is formally accepted by the French government.  No works are expected to begin on the permit,if at all, prior to the second half of 2011, therefore no claims have been madeor are currently anticipated under this agreement.

 

Fromtime to time, we are named as a defendant in other legal proceedings arising inthe normal course of business. In our opinion, the final judgment orsettlement, if any, which may be awarded with any suit or claim would not havea material adverse effect on our financial position

 

OnDecember 11, 2008, TEF filed an application for the extension of thevalidity of Châteaurenard Concession and the Saint-Firmin-des-Bois Concessionfor a period of 25 years.  Pursuant toFrench law governing mines and underground storage, the French Minister incharge of energy must decide upon renewal of such concessions within a periodof two years from the date the applications were filed, which requires theapproval of both the *Conseil Général de l’Industrie*,*de l’Energie et des Technologies* and of the *Conseil d’Etat* (i.e. the French administrative supremebody).  The *Conseil Général de l’Industrie,de l’Energie et des Technologies* approved the renewal of theChâteaurenard Concession and the Saint-Firmin-des-Bois Concession on October 11,2010.  Inaccordance with French law, the renewal of such concessions is now under reviewby the *Conseil d’Etat*. The main criteria forrenewal are the technical and financial capacities of the applicant.

** **

**NOTE 12 — DISCONTINUED OPERATIONS**

 

Inthe fourth quarter of 2008 and during the first quarter of 2009, Toreadorfarmed out or sold all of its working interests in Romania to three differentcompanies and closed its office; thus, we no longer have any operationalinvolvement in Romania. This resulted in a gain of $5.8 million, which wasrecorded in the first quarter of 2009.

 

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OnMarch 3, 2009 we completed the sale of a 26.75% interest in the SouthAkcakoca Sub-Basin (SASB) project associated licenses located in the Black Seaoffshore Turkey, to Petrol Ofisi for $55 million. In accordance with therevised assignment announced on February 3, 2009, $50 million of theproceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining $5million was paid on September 1, 2009. There was no gain or loss resultingfrom this sale.

 

OnSeptember 30, 2009, the Company entered into a Share Purchase Agreement(the “Share Purchase Agreement”) with Tiway Oil BV, a company organized underthe laws of the Netherlands (“Tiway”), and Tiway Oil AS, a company organizedunder the laws of Norway, pursuant to which the Company agreed to sell 100% ofthe outstanding shares of Toreador Turkey to Tiway for total considerationconsisting of: (1) a cash payment of $10.5 million to be paid at closing,(2) exploration success payments dependent upon certain future commercialdiscoveries as provided in the Share Purchase Agreement, up to a maximumaggregate consideration of $40 million, and (3) future quarterly 10%pre-tax net profit interest payments if a field goes into production that wasdiscovered by an exploration well drilled within four years of closing oncertain of the licenses then still held by Tiway. The sale of Toreador Turkeywas completed on October 7, 2009 and resulted in a gain of $1.8 million.

 

Asof September 30, 2010, we had accrued approximately $880,000 as acontingent liability for indemnification claims in connection with the salesreferred above and legal costs expense of $106,000 (See “Note 11 — Commitments and Contingencies”). In addition,we recorded $81,000 in discontinued operations for payments made to Hunnisettand Barker with regard to the Overriding Royalty.

 

OnSeptember 30, 2009, the Company entered into a Quota Purchase Agreement(the “Quota Purchase Agreement”) with RAG (Rohöl AufsuchungsAktiengesellschaft), a corporation organized under the laws of Austria (“RAG”),pursuant to which the Company agreed to sell 100% of its equity interests inToreador Hungary Limited to RAG for total consideration consisting of(1) a cash payment of $5.4 million (€ 3.7 million) paid at closing,(2) $435,000 (€ 300,000), which was held back subject to a post-closingadjustment and was paid to us on November 5, 2009 and (3) acontingent payment of $2.9 million (€2 million) to be paid uponpost-transaction completion of agreements relating to certain assets ofToreador Hungary. The sale of Toreador Hungary was completed onSeptember 30, 2009 and resulted in a loss of $4.1 million.

 

Theresults of operations of assets in Romania, Turkey and Hungary have beenpresented as discontinued operations in the accompanying consolidated statementof operations.  Results for these assets reported as discontinuedoperations were as follows:

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenue and other income                                               |       |                             |       |                            |       |   |   |   |   |
| Sales and other operating revenue                                      |       | $                                | —     |                            | $          | 1,632 |   | $ | — |   | $ | 4,545 |   |
| Operating costs and expenses:                                          |       |                             |       |                            |       |   |   |   |   |
| Lease operating expense                                                |       | —                           |       | 381                             |       | — |   | 886 |   |
| Exploration expense                                                    |       | —                           |       | 136                             |       | — |   | 868 |   |
| Dry hole costs                                                         |       | —                           |       | 1,318                           |       | — |   | 1,318 |   |
| Depreciation, depletion and amortization                               |       | —                           |       | 52                              |       | — |   | 157 |   |
| Accretion on discounted assets and liabilities                         |       | —                           |       | —                          |       | — |   | — |   |
| Impairment of oil and natural gas properties                           |       | —                           |       | 5,425                           |       | — |   | 10,725 |   |
| General and administrative expense                                     |       | 106                              |       | 1,720                           |       | 763 | (1) | 3,424 |   |
| (Gain) loss on sale of properties and other assets                     |       | —                           |       | 4,171                           |       | — |   | (1,675 | ) |
| Total operating costs and expenses                                     |       | —                           |       | 13,203                          |       | 763 |   | 15,703 |   |
| Operating loss                                                         |       | (106                             | )          | (11,571                         | )          | (763 | ) | (11,158 | ) |
| Other income (expense)                                                 |       |                             |       |                            |       |   |   |   |   |
| Foreign currency exchange gain                                         |       | —                           |       | 1,190                           |       | — |   | 3,822 |   |
| Interest and other income                                              |       | —                           |       | 18                              |       | — |   | 414 |   |
| Loss on early extinguishment of debt — revolving  credit facility |       | —                           |       | —                          |       | — |   | (4,881 | ) |
| Other expense                                                          |       | 81                               |       | —                          |       | 246 |   | — |   |
| Interest expense, net of interest capitalized                          |       | —                           |       | (155                            | )          | — |   | (185 | ) |
| Loss before income taxes                                               |       | (187                             | )          | (10,518                         | )          | (1,009 | ) | (11,988 | ) |
| Income tax provision                                                   |       | (104                             | )          | —                          |       | (104 | ) | — |   |
| Net loss from discontinued operations                                  |       | $                                | (291       | )                               | $          | (10,518 | ) | $ | (1,113 | ) | $ | (11,988 | ) |

 

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(1) Residualexit costs.

** **

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**NOTE 13 — DERIVATIVES**

 

Weperiodically utilize derivative instruments such as futures and swaps forpurposes of hedging our exposure to fluctuations in the sale price of crudeoil. In December 2009, we entered into futures and swap contracts for approximately15,208 Bbls per month for the months of January 2010 throughDecember 2010.  This resulted in a net unrealized derivative fairvalue gain of $709,000 at September 30, 2010. Presented in the table belowis a summary of the contracts entered into for 2010:

 
| **Type** | ** ** | **Period**                                     | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Unrealized loss for  the three months  ended September  30, 2010** | ** ** |
|----------|------------|------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------------------------------------------------------------------------------------------------|------------|
|     |       |                                           |       |        |       |      |       |        |       |                                                                                               |       |
| Collar   |       | January 1,  2010 - December 31, 2010 |       | 182,500     |       | $         | 68.00      |        | $          | 81.00                                                                                              |       | $ | 105 |   |
|          |            |                                                |            |             |            |           |            |             |            |                                                                                                    |            |  |  |  |

 

OnNovember 2, 2010, we entered into futures and swaps contracts for 2011.See “Note 19 — Subsequent Events” for further information.

** **

**NOTE 14 — FAIR VALUE MEASUREMENTS**

 

Thecarrying amounts of financial instruments including cash and cash equivalents,short-term investments, accounts receivable, accounts payable and accruedliabilities approximate fair value at September 30, 2010 and December 31,2009, due to the short-term nature or maturity of the instruments.

 

Long-termdebt approximated fair value based on the quoted market prices for the same orsimilar issues or on the current rates offered to the Company for debt of thesame maturities.

 

OnSeptember 30, 2010, the 5.00% Convertible Senior Notes, which had a bookvalue of $35.0 million, were trading at $95.2, which would equal a fair marketvalue of approximately $31 million.

 

OnDecember 31, 2009, the 5.00% Convertible Senior Notes, which had a bookvalue of $54.6 million, were trading at or near par value, which would equal afair market value of approximately $54.6 million.

 

OnSeptember 30, 2010, the New Convertible Senior Notes, which had a bookvalue of $31.6 million, were trading at $114.71 which would equal a fair marketvalue of approximately $36.3 million.

 

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ASC820 “Fair value measurements and disclosures,” formerly SFAS No. 157,establishes a fair value hierarchy which prioritizes the inputs to valuationtechniques used to measure fair value into three levels. The fair valuehierarchy gives the highest priority to quoted market prices (unadjusted) inactive markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3). Level 2 inputs are inputs, otherthan quoted prices included within Level 1, which are observable for the assetor liability, either directly or indirectly.

 

Certainassets and liabilities are reported at fair value on a nonrecurring basis inour consolidated balance sheets.  The following methods and assumptionswere used to estimate the fair values:

 

***Asset Impairments*** - The Company reviews a proved oil and gas property for impairmentwhen events and circumstances indicate a possible decline in the recoverabilityof the carrying value of such property. We estimate the undiscounted futurecash flows expected in connection with the property and compare suchundiscounted future cash flows to the carrying amount of the property todetermine if the carrying amount is recoverable. If the carrying amount of theproperty exceeds its estimated undiscounted future cash flows, the carryingamount of the property is reduced to its estimated fair value. Fair value maybe estimated using comparable market data, a discounted cash flow method, or acombination of the two. In the discounted cash flow method, estimated futurecash flows are based on management’s expectations for the future and includeestimates of future oil and gas production, commodity prices based on commodityfutures price strips as of the date of the estimate, operating and developmentcosts, and a credit risk-adjusted discount rate.

 

Theimpairment charge in Turkey of $5.3 million which is recorded in discontinuedoperations for the period ended September 30, 2009, is a result of adecline in the fair market value of the Company’s interest in South AkcakocaSub-Basin asset. The fair market value declined during the first quarter of2009 due to a 25.00% reduction in the posted sales price of natural gas producedin Turkey announced on May 1, 2009.

 

***Goodwill***- We account for goodwill in accordance with FASB Accounting StandardsCodification No. 350 *“Intangibles-Goodwill and Other*” (“ASC 350”). Under ASC 350,goodwill and indefinite-lived intangible assets are not amortized but arereviewed annually (or more frequently if impairment indicators arise) forimpairment. Goodwill fair value is estimated using discounted cash flow method.

 

***Asset Retirement Obligations*** — The initial measurement of asset retirement obligations at fairvalue is calculated using cash flows techniques and based on internal estimatesof future retirement costs associated with oil and gas properties. SignificantLevel 3 inputs used in the calculation of asset retirement obligations includeplugging costs and reserve lives. A reconciliation of the Company’s assetretirement obligation is presented in “Note 6 — Asset Retirement Obligations”.

 

EffectiveJanuary 1, 2008, we adopted the authoritative guidance that applies to allfinancial assets and liabilities required to be measured and reported on a fairvalue basis. Beginning January 1, 2009, we also applied the guidance tonon-financial assets and liabilities. Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (exit price).The guidance requires disclosure that establishes a framework for measuringfair value expands disclosure about fair value measurements and requires thatfair value measurements be classified and disclosed in one of the followingcategories:

 
| Level 1: | Unadjusted quoted prices in active markets that are accessible at  the measurement date for identical, unrestricted assets or liabilities. We  consider active markets as those in which transactions for the assets or  liabilities occur with sufficient frequency and volume to provide pricing  information on an ongoing basis.                                                                                                                                                                                                                                                                                                                                                                    |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 2: | Quoted prices in markets that are not active, or inputs that are  observable, either directly or indirectly, forsubstantially the full term of the asset or liability. This category  includes those derivative instruments thatwe value using observable market data. Substantially all of these  inputs are observable in the marketplace throughout the full term of the  derivative instrument, can be derived from observable data or supported by  observable levels at which transactions are executed in the market place.  Instruments in this category include non-exchange traded derivatives such as  over-the-counter commodity price swaps, certain investments and interest rate  swaps. |

 

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| Level 3: | Measured based on prices or valuation models that require inputs  that are both significant to the fair valuemeasurement and less observable from objective sources (i.e.,  supported by little or no market activity).Our valuation models for derivative contracts are primarily  industry-standard models (i.e., Black-Scholes)that consider various inputs including: (a) quoted forward  prices for commodities, (b) time value, (c) volatility factors,  (d) counterparty credit risk and (e) current market and contractual  prices for the underlying instruments, as well as other relevant economic  measures. Level 3 instruments primarily include derivative instruments, such  as basis swaps, commodity price collars and floors and accrued liabilities.  Although we utilize third**-**party  broker quotes to assess the reasonableness of our prices and valuation  techniques, we do not have sufficient corroborating market evidence to  support classifying these assets and liabilities as Level 2. |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Measurementinformation for assets that are measured at fair value on a non-recurring basiswas as follows:

 
| ** **                                     | ** ** | ** **                       | ** ** | **Fair Value Measurements Using**            | ** ** | ** **                                                     | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Description**                                | ** ** | **Fair Value  Measurement** | ** ** | **Quoted  Prices in  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level  3)** | ** ** | **Total  Inpaiment Loss** | ** ** |
| ** **                                     | ** ** | **(in thousands)**          | ** ** |
| **Nine Months Ended  September 30, 2010** |       |                             |       |                                                        |       |                                                           |       |   |   |   |   |
|                                           |       |                             |       |                                                        |       |                                                           |       |   |   |   |   |
| 8.00/7.00% Convertible Senior Notes            |       | $                                | 35,065     |                                                        | —     |                                                           | —     |   | $ | 35,065 |   | $ | — |   |
|                                           |       |                             |       |                                                        |       |                                                           |       |   |   |   |   |
| **Nine Months Ended  September 30, 2009** |       |                             |       |                                                        |       |                                                           |       |   |   |   |   |
|                                           |       |                             |       |                                                        |       |                                                           |       |   |   |   |   |
| Impaired oil and natural gas properties        |       | $                                | 16,507     |                                                        | —     |                                                           | —     |   | $ | 16,507 |   | $ | (10,725 | ) |

 

Thefollowing table summarizes the valuation of our investments and financialinstrument assets (liabilities) measured on a recurring basis at fair value bypricing levels:

 
| ** **                  | ** ** | **Fair Value Measurement Using** | ** ** | ** **         | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|--------------------|------------|
| ** **                  | ** ** | **(Level 1)**                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **Total** | ** ** |
|                        |       |                                            |       |               |       |   |   |   |   |
| As September 30, 2010: |       |                                            |       |               |       |   |   |   |   |
| Oil derivative contracts    |       | $                                               | —     |               | $          | — |   | $ | 177 |   | $ | 177 |   |
|                        |       |                                            |       |               |       |   |   |   |   |
| Total                       |       | $                                               | —     |               | $          | — |   | $ | 177 |   | $ | 177 |   |
|                        |       |                                            |       |               |       |   |   |   |   |
| As December 31, 2009:  |       |                                            |       |               |       |   |   |   |   |
| Oil derivative contracts    |       | $                                               | —     |               | $          | — |   | $ | 886 |   | $ | 886 |   |
|                        |       | $                                               | —     |               | $          | — |   | $ | 886 |   | $ | 886 |   |

 

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The table below summarizes the change in carrying values associatedwith Level 3 financial instruments:

 
| ** **                     | ** ** | **Nine Months Ended**        | ** ** | **Year ended**                    | ** ** |
|--------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **September 30, 2010**       | ** ** | **December 31, 2009**        | ** ** |
| ** **                     | ** ** | **Oil Derivative Contracts** | ** ** | **Oil Derivative Contracts** | ** ** |
| Balance at beginning of period |       | $                                      | 886        |                                   | $          | — |   |
| Unrealized (gain) loss         |       | (709                                   | )          | 886                                    |       |
|                           |       |                                   |       |                                   |       |
| Balance at end of period       |       | $                                      | 177        |                                   | $          | 886 |   |

** **

**NOTE 15 — IMPAIRMENT OF ASSETS**

 

Weevaluate producing property costs for impairment and reduce such costs to fairvalue if the sum of expected undiscounted future cash flows is less than netbook value pursuant to FASB ASC 360 “Property, Plant and Equipment,” formerlyStatement of Financial Accounting Standard No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“Statement 144”). We assessimpairment of non-producing leasehold costs and undeveloped mineral and royaltyinterests periodically on a field-by-field basis. We charge any impairment invalue to expense in the period incurred. For the three and nine months ended September 30,2010, there was no impairment charge for our continuing operations anddiscontinued operations.

 

Theimpairment charge in Turkey of $5.3 million (included in discontinuedoperations), as of September 30, 2009, was a result of a decline in thefair market value of the Company’s interest in South Akcakoca Sub-Basin asset.The fair market value declined during the first quarter of 2009 due to a 25.00%reduction in the posted sales price of natural gas produced in Turkey announcedon May 1, 2009.

 

Inthe third quarter of 2009, the Company decided not to proceed with theconstruction of the Kiha pipeline in Hungary, due to the poor results of theTompa Deep well and the impending sale of Toreador Hungary, which was completedon September 30, 2009. This resulted in an impairment of $5.4 million(included in discontinued operations) which represented our share of costscapitalized for the pipeline and the previously drilled Kiha 15 well.

** **

**NOTE 16— AGREEMENT WITH HESS**

 

OnMay 10, 2010, Toreador Energy France S.C.S. (“TEF”), a company organizedunder the laws of France and an indirect subsidiary of the Company, enteredinto an Investment Agreement (the “Investment Agreement”) with Hess Oil FranceS.A.S. (“Hess”), a company organized under the laws of France and a whollyowned subsidiary of Hess Corporation, a Delaware corporation, pursuant to which(x) Hess becomes a 50% holder of TEF’s working interests in its awardedand pending exploration permits in the Paris Basin, France (the “Permits”)subject to fulfillment of Work Program (as described in(y) (2) hereafter) and (y) (1) Hess must make a $15 millionupfront payment to TEF, (2) Hess will have the right to invest up to $120million in fulfillment of a two-phase work program (the “Work Program”) and(3) TEF would be entitled to receive up to a maximum of $130 million ofsuccess fees based on reserves and upon the achievement of an oil productionthreshold, each as described more fully below.

 

The*Ministère de l’Ecologie,de l’Energie, du Développement Durable et de la Mer* (Ministry ofEcology, Energy, Sustainable Development and the Sea) in France grantedfirst-stage approval on June 25, 2010. Anapplication for the grant to Hess of title (together with TEF) on each of thepending exploration permits in the Paris Basin has also been filed with theFrench Government.

 

Pursuantto the Investment Agreement, TEF has transferred 50% of its working interest ineach Permit to Hess (collectively, the “Transfer Working Interests”) and, onJune 10, 2010, Hess paid TEF $15 million plus VAT, i.e., an aggregateamount of $17.9 million (such payment having been recorded as other income forthe nine months period ended September 30, 2010 as this revenue is notsubject to any further obligation or performance by the Company nor is itdependent upon any approval).

 

Underthe terms of the Investment Agreement, Phase 1 of the Work Program is expectedto consist of an evaluation of the acreage underlying the Permits and thedrilling of six wells. The parties have agreed to use reasonable endeavors tospud the first well by December 1, 2010, the second well by theMarch 31, 2011 and the third well by September 30, 2011.  IfHess does not spend $50 million in fulfillment of the Work Program within 30 monthsof receipt of government approval (“Phase 1”), Hess must promptly transfer backto TEF the Transfer Working Interests.

 

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Underthe terms of the Investment Agreement, if Hess spends $50 million in Phase 1,Hess will have the option to proceed to Phase 2 of the Work Program. If Hesselects not to proceed to Phase 2 of the Work Program, Hess must promptlytransfer back to TEF a percentage of the Transfer Working Interests determinedwith reference to the amount of money spent by Hess in fulfillment of the WorkProgram during Phase 1.

 

Underthe terms of the Investment Agreement, if Hess elects to proceed, Phase 2 ofthe Work Program is expected to consist of appraisal and developmentactivities, depending on the results of the work in Phase 1. If Hess does notspend $70 million (less money spent by Hess in fulfillment of the Work Programin excess of $50 million in Phase 1) in fulfillment of the Work Program within36 months (“Phase 2”), Hess must promptly transfer back to TEF a percentage ofthe Transfer Working Interests determined with reference to the amount of moneyspent by Hess in fulfillment of the Work Program during Phase 1. FollowingPhase 2, TEF and Hess will bear the costs of subsequent exploration, appraisaland development activities in accordance with individual participationagreements governing the joint operations on each Permit.

 

Underthe terms of the Investment Agreement, Hess agrees to pay TEF: (x) a successfee based on proved developed oil reserves (as defined byRule 4-10(a) of Regulation S-X), up to a maximum of $80 million and(y) a success fee if oil production exceeds an agreed threshold, up to amaximum of $50 million, each of which is subject to reduction under certaincircumstances.

 

Underthe terms of the Investment Agreement, TEF and Hess have designated an area ofmutual interest within the Paris Basin (the “AMI”). If either party acquires orapplies for a working interest in an exploration permit or exploitationconcession within the AMI, such party would be required to offer to the otherparty 50% of such interest on the same terms and conditions.

 

Underthe terms of the Investment Agreement, TEF is entitled to invoice Hess for allpersonal general and administrative costs associated with its activities asoperator of the Permits. For the three and nine months ending September 30,2010, $560,000 was invoiced to Hess and recorded as “Other income.”

** **

**NOTE 17 — PENSION, POST-RETIREMENT, AND POST-EMPLOYMENTOBLIGATIONS**

 

Provisionsfor employee retirement obligations amounted to $273,000 and $0 for the ninemonths ended September 30, 2010 and September 30, 2009, respectively.Pension benefits, which only consist in retirement indemnities, have beendefined only for the Company’s French subsidiaries.

** **

**NOTE 18 — STOCK COMPENSATION PLANS**

 

Wehave granted stock options to key employees and outside directors of Toreadoras described below.

 

InMay 1990, we adopted the 1990 Stock Option Plan (“1990 Plan”). The 1990Plan, as amended and restated, provides for grants of up to 1,000,000 stockoptions to employees and directors at exercise prices greater than or equal tomarket on the date of the grant.

 

InDecember 2001, we adopted the 2002 Stock Option Plan (“2002 Plan”). The2002 Plan provides for grants of up to 500,000 stock options to employees andoutside directors at exercise prices greater than or equal to market on thedate of the grant.

 

InSeptember 1994, we adopted the 1994 Non-employee Director Stock OptionPlan (“1994 Plan”). The 1994 Plan, as amended and restated, provides for grantsof up to 500,000 stock options to non-employee directors of Toreador atexercise prices greater than or equal to market on the date of the grant.

 

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TheBoard of Directors grants options under our plans periodically. Generally,option grants are exercisable in equal increments over a three-year period, andhave a maximum term of 10 years.

 

Asummary of stock option transactions is as follows:

 
| ** **                           | ** ** | **2010**   | ** ** | **2009**                                   | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE PRICE** | ** ** | **SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE PRICE** | ** ** |
| Outstanding at January 1        |       | 67,370     |       | $                                          | 7.78       |   | 248,370 |   | $ | 6.77 |   |
| Granted                              |       | —     |       | —                                     |       | — |   | — |   |
| Exercised                            |       | (5,000     | )          | $                                          | 3.10       |   | (31,000 | ) | $ | 3.67 |   |
| Forfeited                            |       | —     |       |                                       |       | (150,000 | ) | $ | 6.96 |   |
| Outstanding at the end of the period |       | 62,370     |       | $                                          | 8.15       |   | 67,370 |   | $ | 7.78 |   |
| Exercisable at the end of the period |       | 62,370     |       | $                                          | 8.15       |   | 67,370 |   | $ | 7.78 |   |

 

Theintrinsic value of the options exercised at September 30, 2010 waszero.  For the nine months ended September 30, 2010 and for the yearended December 31, 2009 we received cash from stock option exercises of$15,500 and $113,875, respectively.  As of September 30, 2010, alloutstanding options were 100% vested.  As of September 30, 2010 and December 31,2009, the total compensation cost related to non-vested stock options not yetrecognized was zero.

 

Thefollowing table summarizes information about the fixed price stock optionsoutstanding at September 30, 2010:

 
| ** **              | ** ** | **Number Outstanding** | ** ** | **Number Exercisable**                   | ** ** | **Weighted Average  Remaining** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|
| **Exercise Price** | ** ** | **Shares**                  | ** ** | **Intrinsic Value  (in thousands)** | ** ** | **Shares**                           | ** ** | **Intrinsic Value  (in thousands)** | ** ** | **Contractual Life in  Years** | ** ** |
|                    |       |                        |       |                                          |       |                                 |       |   |   |   |   |
| 3.12                    |       |                        | 620        |                                          | $          | 1                                    |       | 620 |   | $ | 1 |   | 0.22 |   |
| 3.12                    |       |                        | 3,800      |                                          | 9          |                                 | 3,800      |   | 9 |   | 0.22 |   |
| 5.50                    |       |                        | 200        |                                          | —     |                                 | 200        |   | — |   | 3.82 |   |
| 5.50                    |       |                        | 40,250     |                                          | —     |                                 | 40,250     |   | — |   | 3.82 |   |
| 13.75                   |       |                        | 7,500      |                                          | (62        | )                                    | 7,500      |   | (62 | ) | 4.38 |   |
| 16.90                   |       |                        | 10,000     |                                          | (114       | )                                    | 10,000     |   | (114 | ) | 4.89 |   |
|                    |       | 62,370                      |       | $                                             | (165       | )                                    | 62,370     |   | $ | (165 | ) | 2.89 |   |

 

InMay 2005, the Company’s stockholders approved the Toreador ResourcesCorporation 2005 Long-Term Incentive Plan (the “Plan”). At the Company’s 2010Annual Meeting of Stockholders, the stockholders of the Company approved anamendment to the Plan which increased the authorized number of shares ofCompany common stock available under the Plan from 1,750,000 shares to3,250,000 shares. Thus, the Plan, as amended, authorizes the issuance of up to1,500,000 new shares of the Company’s common stock to key employees, keyconsultants and outside directors of the Company.

 

AtSeptember 30, 2010 the Board of Directors has authorized a total of266,750 shares of restricted stock to be granted to employees and non-employeedirectors. The compensation cost is measured by the difference between thequoted market price of the stock at the date of grant and the price, if any, tobe paid by an employee or director and is recognized as an expense over theperiod the recipient performs related services. The restricted stock grantsvest immediately or over up to a three-year period (depending on the grant),and the weighted average price of the stock on the date of the grants was $9.32for the nine months ended September 30, 2010.

 

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Stockcompensation expense of $0.4 million is included in the Statement of Operationsfor the three months ended September 30, 2010 and stock compensationexpense of $ 2.6 million is included in the Statement of Operations for thenine months ended September 30, 2010, which represents the cost recognizedfrom the date of the grants through September 30, 2010. As of September 30,2010, the total compensation cost related to non-vested restricted stock grantsnot yet recognized is approximately $3.2 million. This amount will berecognized as compensation expense over the next 36 months.

 

OnSeptember 30, 2010, there were 1,339,421 remaining shares available forgrant under the Plan.

 

Thefollowing table summarizes the changes in outstanding restricted stock grantsalong with their related grant-date fair values for the year ended September 30,2010:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| Non-vested at December 31, 2009  |       | 378,130    |       | $                                                      | 10.25      |   |
| Shares granted                        |       | 266,750    |       | $                                                      | 9.32       |   |
| Shares vested                         |       | (298,708   | )          | $                                                      | 8.93       |   |
| Shares forfeited                      |       | —     |       | —                                                 |       |
| Non-vested at September 30, 2010 |       | 346,172    |       | $                                                      | 10.55      |   |

** **

**NOTE 19— SUBSEQUENT EVENTS**

 

TheCompany evaluated its September 30, 2010 financial statements forsubsequent events through the date the financial statements were issued.  Except as indicated below, no subsequentevents require disclosure.

 

Inaccordance with the terms, procedures and conditions outlined in the indentureand the 5.00% Convertible Senior Notes, each holder of the 5.00% ConvertibleSenior Notes had an option to require the Company to purchase all or a portionof its 5.00% Convertible Senior Notes on October 1, 2010.  Pursuant to the exercise of this option, theCompany repurchased $32,256,000 principal amount of the 5.00% ConvertibleSenior Notes on October 1, 2010. Interest on the repurchased 5.00% Convertible Senior Notes accrued upto, but not including, October 1, 2010 was been paid to record holders of5.00% Convertible Senior Notes as of September 15, 2010.  The repurchase on October 1, 2010resulted in a loss of $1.1 million after writing off all deferred debt issuancecosts pertaining to the 5.00% Convertible Senior Notes.  The Company has elected to redeem the$129,000 principal aggregate amount of the 5.00% Convertible Senior Notesoutstanding in accordance with the terms of the indenture, has provided noticeto the holders of such redemption and expects to effect this redemption on November 24,2010.

 

OnOctober 6, 2010, Toreador received a claim notice from Tiway under the SPAin respect of an arbitration initiated by TPAO against Tiway relating toalleged damages and losses suffered in connection with the Akcakoca-cayagzipipeline construction project in 2005. See “Note 11 — Commitments andContingencies” for further information.

 

OnOctober 20, 2010, English High Court proceedings, commenced by Hunnisettand Barker as well as Netherby Investments Limited against Tiway Turkey Limitedand the Company, were served on the Company. See “Note 11 — Commitments and Contingencies” for further information.

 

We periodically utilize derivative instrumentssuch as futures and swaps for purposes of hedging our exposure to fluctuationsin the sale price of crude oil. On November 2, 2010, the Company entered intocollars contracts with Vitol Trading SA for 500 Bbls per day (or approximately15,208 Bbls per month) from January 1, 2011 to December 31, 2011 witha floor price at $78/Bbl and a ceiling price at $91/Bbl.

 

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**ITEM 2 — *MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND******RESULTS OFOPERATIONS***

 

Thefollowing discussion is intended to assist you in understanding our businessand results of operations together with our present financial condition. Thissection should be read in conjunction with our Consolidated FinancialStatements and the accompanying notes included elsewhere in this QuarterlyReport on Form 10-Q, as well as our Annual Report on Form 10-K forthe year ended December 31, 2009, which was filed with the SEC onMarch 16, 2010.  Certain prior-year amounts have been reclassifiedand adjusted to present the operations of Turkey, Hungary and Romania asdiscontinued operations.

** **

**DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainmatters discussed under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this report mayconstitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”) and, as such, may involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements to be materially different from future results, performance orachievements expressed or implied by such forward-looking statements. When usedin this report, the words “anticipates,” “estimates,” “plans,” “believes,” “continues,”“expects,” “projections,” “forecasts,” “intends,” “may,” “might,” “will,” “would,”“could,” “should,” and similar expressions are intended to be among thestatements that identify forward-looking statements. The factors that mayaffect our expectations regarding our operations include, among others, thefollowing:

 

·                  ourability to raise necessary capital in the future;

·                  ourability to maintain or renew our existing exploration permits or exploitationconcessions or obtain new ones;

·                  theeffect of our indebtedness on our financial health and business strategy;

·                  ourability to execute our business strategy and be profitable;

·                  ourability to replace oil reserves;

·                  achange in the SEC position on our calculation of proved reserves;

·                  theloss of the current purchaser of our oil production;

·                  resultsof our hedging activities;

·                  theloss of senior management or key employees;

·                  political,legal and economic risks associated with having international operations;

·                  disruptionsin production and exploration activities in the Paris Basin;

·                  currencyfluctuations;

·                  failureto maintain adequate internal controls;

·                  indemnitiesgranted by us in connection with dispositions of our assets;

·                  unfavorableresults of legal proceedings;

·                  assessingand integrating acquisition prospects;

·                  declinesin prices for crude oil;

·                  ourability to compete in a highly competitive oil and gas industry;

·                  ourability to obtain equipment and personnel;

·                  extensiveregulation, including environmental regulation, to which we are subject;

·                  terroristactivities;

·                  oursuccess in development, exploitation and exploration activities;

·                  reservesestimates turning out to be inaccurate; and

·                  differencesbetween the present value and market value of our reserves.

 

Inaddition to these factors, important factors that could cause actual results todiffer materially from our expectations (“Cautionary Statements”) are disclosedunder “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2009, filed with the SEC on March 16, 2010, which are incorporated byreference herein.

 

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Allwritten and oral forward-looking statements attributable to us are expresslyqualified in their entirety by the Cautionary Statements.  We undertake noobligation to update or revise publicly any forward-looking statements, whetheras a result of new information, future events, or otherwise.

** **

**EXECUTIVE OVERVIEW**

 

Weare an independent energy company engaged in the exploration and production ofcrude oil with interests in developed and undeveloped oil properties in theParis Basin, France. We are currently focused on the development of ourconventional fields and the exploitation of the prospective shale oil playwithin our Paris Basin acreage position.

 

Wecurrently operate solely in the Paris Basin, which covers approximately 170,000km2 of northeastern France, centered50 to 100 km east and south of Paris. At September 30, 2010, we heldinterests in approximately 683,000 gross exploration acres. According toGaffney, Cline & Associates Ltd, an independent petroleum andgeological engineering firm, or Gaffney Cline, as of December 31, 2009,our proved reserves were 5.8 MBbls, our proved plus probable reserves were 9.1MBbls and our proved plus probable plus possible reserves were 14.3 MBbls. Ourproduction for 2009 averaged approximately 900 bbl/d from two conventionaloilfield areas in the Paris Basin **-**the Neocomian Complex and Charmottes fields. As of September 30, 2010,production from these oil fields represented substantially all of our sales andoperating revenue. We intend to maintain production from these mature assetsusing when necessary suitable enhanced oil recovery techniques. In addition tothis production base, we have identified several additional conventionalexploration targets.

 

Weare also currently focused on exploiting our shale oil acreage in the ParisBasin by executing with our strategic partner, Hess Oil France S.A.S., a proofof concept program by drilling, completing and testing pilot wells.

 

**Operations Update**

 

***Hess Partnership***

 

On May 10, 2010, Toreador Energy FranceS.C.S. (“TEF”), a company organized under the laws of France and an indirectsubsidiary of the Company, entered into an Investment Agreement (the “InvestmentAgreement”) with Hess Oil France S.A.S. (“Hess”), a company organized under thelaws of France and a wholly owned subsidiary of Hess Corporation, a Delawarecorporation, relating to exploitation of our shale oil acreage in the ParisBasin. Pursuant to the Investment Agreement (x) Hess may become a 50%holder of TEF’s working interests in its awarded and pending explorationpermits in the Paris Basin, France (the “Permits”) and (y) (1) Hessmust make a $15 million upfront payment to TEF, (2) Hess will have theright to invest up to $120 million in fulfillment of a two-phase work program(the “Work Program”) and (3) TEF would be entitled to receive up to amaximum of $130 million of success fees based on reserves and upon the achievementof an oil production threshold. In accordance with the Investment Agreement,Hess made the $15 million upfront payment (plus applicable VAT of $2.9 million)to TEF on June 10, 2010.

 

Pursuant to the Investment Agreement, subjectto such government approval, TEF has transferred 50% of its working interest ineach Permit to Hess (collectively, the “Transfer Working Interests”). The *Ministère de l’Ecologie, de l’Energie, duDéveloppement Durable et de la Mer* (Ministry of Ecology, Energy,Sustainable Development and the Sea) in France granted first-stage approval onJune 25, 2010. An application forthe grant to Hess of title (together with TEF) on the pending explorationpermits in the Paris Basin has also been filed with the French Government.

 

On October 10, 2010,TEF and Hess obtained definitive approval and necessary environmental permitsfrom the relevant French local and regional authorities (DRIE, DREAL andPréfecture) for the initial four well locations, for which we applied in thesecond quarter of 2010. The initial phase of the drilling program, expected tocomprise six or more unconventional exploration wells, is forecast to begin inJanuary 2011. The first well will be a vertical well located on theChateau Thierry exploration permit located about 70 km east of Paris. TEF willremain operator of record in the near-term while work is carried out underHess’s supervision.  On October 22,2010, TEF and Hess agreed on a firm budget of $56 million for 2011, which willbe funded out of Hess’s commitments under the terms of the May 10, 2010Investment Agreement. There is a possible additional $20 million ofdiscretionary spending for 2011 that will be decided at a later date betweenHess and TEF.

 

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*** ***

***La Garenne Well***

 

The LGA-1 exploration well(La Garenne) was drilled and tested on the Rigny le Ferron exploration permitin late 2009 and early 2010. The well confirmed a five-meter reservoir within a50-meter oil column in the target Dogger formation, but low permeability in thevicinity of the wellbore. A decision regarding whether or not to drill ahorizontal appraisal well and to develop the reservoir will be made in thefirst quarter of 2011.

 

**Concessions Renewal**

 

OnDecember 11, 2008, TEF filed an application for the extension of the validityof Châteaurenard Concession and the Saint-Firmin-des-Bois Concession for aperiod of 25 years.  Pursuant to Frenchlaw governing mines and underground storage, the French Minister in charge of energymust decide upon renewal of such concessions within a period of two years from thedate the applications were filed, which requires the approval of both the *Conseil Général de l’Industrie, de l’Energie et des Technologies*and of the *Conseil d’Etat* (i.e. the Frenchadministrative supreme body).  The *Conseil Général de l’Industrie, de l’Energie et des**Technologies* approved the renewal of the ChâteaurenardConcession and the Saint-Firmin-des-Bois Concession on October 11, 2010.  Inaccordance with French law, the renewal of such concessions is now under reviewby the*Conseil d’Etat.* The main criteria forrenewal are the technical and financial capacities of the applicant.

 

**Strategy**

 

Theprimary components of our strategy are:

 

·                  *Focus on France. * All of our oil assets are currentlylocated in France, having disposed of our interests in Turkey, Romania andHungary in 2009. We believe we can leverage our substantial acreage positionand our experience and industry relationships in France to grow the Company.

 

·                  *Capture, develop and accelerate conventional prospects.*   We have identified a number of conventional oilprospects, which we intend to evaluate for potential development, beginningwith La Garenne.

 

·                  *Target the prospective unconventional oil resource play.*  We are currently working with Hess on our proof of conceptprogram and potential development of our Paris Basin shale oil acreageposition.

 

·                  *Seize the opportunities for external growth. *We continue to evaluate and, where appropriate,intend to pursue acquisition opportunities on terms we consider favorable.  In particular, we consider acquisitions ofbusinesses or interests that will complement and allow us to expand ouractivities.  However, currently, we haveno binding commitments related to any acquisitions.

 

·                  *Continue to focus on operational costs. * Since the beginning of 2009, we haveimproved operational efficiencies, and we continue to focus on maintainingefficient operations.

 

·                  *Seek and maintain optimal capital structure.* We intend to maintain a conservativecapital structure over time.

 

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**Financial Summary**

 

Forthe nine months ended September 30, 2010:

 

·                  Revenuesfrom continuing operations were $33.0 million.

 

·                  Operatingcosts from continuing operations were $20.2 million.

 

·                  Lossfrom discontinued operations, net of income taxes, was $1.1 million.

 

·                  Netloss available to common shares was $3.9 million.

 

·                  Productionwas 241 MBOE.

 

At September 30,2010, we had:

 

·                  Cashand cash equivalents of $53.6 million.

 

·                  Acurrent ratio (current assets/current liabilities) of 1.32 to 1.

 

·                  Adebt to equity ratio of 3.24 to 1.

** **

**LIQUIDITY AND CAPITAL RESOURCES**

 

Thissection should be read in conjunction with “Note 5 — Long Term Debt” and “Note19 — Subsequent Events” in the Notes to the Condensed Consolidated FinancialStatements included in this filing.

 

***Liquidity***

 

TheCompany’s liquidity depends on cash flow from operations and existing cashresources.  As of September 30, 2010, we had cash and cash equivalents of$53.6 million, a current ratio of approximately 1.32 to 1 and a debt to equityratio of 3.24 to 1. For the three months ended September 30, 2010, we had an operatingincome of $0.6  million.  We hadsales and other operating revenue of $6.0 million.  We had no othercapital expenditures apart from technical studies of La Garenne for $45,000.The Company does not currently have a credit facility and intends to rely onits cash balance to meet its immediate cash requirements.

 

Ourcash flow from operations is highly dependent upon the prices received from ouroil production, which are dependent on numerous factors beyond ourcontrol.  Accordingly, significant changes to oil prices are likely tohave a material impact on our financial condition, results of operation, cashflows and revenue.  Oil prices have been very volatile over the first ninemonths of 2010, and we expect will continue to be volatile for the remainder ofthe fiscal year 2010.  In order to reduce our exposure to crude oil pricefluctuations, we have entered into a collar contract for approximately 15,208Bbls per month for the months of January 2010 through December 2010for which the floor price is $68.00 per bbl, and the ceiling price is $81.00per bbl. On November 2, 2010, we entered into futures and swaps contracts for2011. See “Note 19 — Subsequent Events” for further information.

 

OnFebruary 1, 2010, we consummated an exchange transaction (the “ConvertibleNotes Exchange”). In the Convertible Notes Exchange, in exchange for(a) $22,231,000 principal amount of our outstanding 5.00% ConvertibleSenior Notes (the “Old Notes”) and (b) $9.4 million cash, we issued$31,631,000 aggregate principal amount of our 8.00%/7.00% Convertible SeniorNotes (the “New Convertible Senior Notes”) and paid accrued and unpaid intereston the Old Notes.   See “Note 5 — 5.00% Convertible Senior Notes DueOctober 1, 2025”, and “Note 5 — 8.00%/7.00% Senior Convertible Notes DueOctober 1, 2025” for further details.

 

OnFebruary 12, 2010, we completed a registered underwritten public offeringof 3,450,000 shares of common stock, including 450,000 shares of common stockacquired by the underwriters from us to cover over-allotment options. The netproceeds to Toreador from the offering were approximately $26.8 million, afterdeducting underwriting discounts, commissions and estimated offering expenses.We intended to use the net proceeds, together with cash on hand, to satisfypayment obligations arising from the holders**’**exercise, if any, of their right on October 1, 2010 to require the Companyto repurchase its 5.00% Convertible Senior Notes and for general corporatepurposes, which may include working capital, capital expenditures andacquisitions. Pending such use, we invested the net proceeds in mutual andmoney market funds and/or bank certificates of deposit. As of September 30,2010, approximately $32.4 million principal aggregate amount of the 5.00%Convertible Senior Notes was outstanding.  On October 1, 2010, the Companyrepurchased $32,256,000 principal amount of the 5.00% Convertible SeniorNotes.  See “Note 19 — Subsequent Events”for further information.

 

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Wecurrently have no mandatory capital expenditures in 2010; however, we arecurrently evaluating the creation of a development plan for the La Garennefield. In addition, under French law, each of our exploration permits andexploitation concessions require that we commit to expenditures of a certainamount over the period of the applicable permit or concession. Though weconsider these amounts discretionary, such expenditures would be required torenew such permits.

 

Webelieve we will have sufficient cash flow from operations and cash on hand tomeet all of our 2010 obligations.

 

**5.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025**

 

OnSeptember 27, 2005, we issued $75 million of Convertible Senior Notes dueOctober 1, 2025 (the “5.00% Convertible Senior Notes”) to qualifiedinstitutional buyers pursuant to Rule 144A of the Securities Act of 1933,as amended (the “Securities Act”). The Company also granted the initialpurchasers the option to purchase an additional $11.25 million aggregateprincipal amount of 5.00% Convertible Senior Notes to cover over-allotments.The over-allotment option was exercised on September 30, 2005. The totalprincipal amount of 5.00% Convertible Senior Notes issued was $86.25 millionand total net proceeds were approximately $82.2 million. We incurredapproximately $4.1 million of costs associated with the issuance of the 5.00%Convertible Senior Notes; these costs have been recorded in other assets on thebalance sheet and are being amortized to interest expense using the straight-lineinterest rate method (which approximates the effective interest method) overthe term of the 5.00% Convertible Senior Notes (i.e., from issuance to the earliestdate on which holders may require the Company to repurchase all or a portion oftheir 5.00% Convertible Notes, in this case October 1, 2010).

 

Thenet proceeds were used for general corporate purposes, including funding aportion of the Company’s 2005 and 2006 exploration and development activities.

 

The5.00% Convertible Senior Notes bear interest at a rate of 5.00% per annum andcan be converted into common stock at an initial conversion rate of 23.3596shares of common stock per $1,000 principal amount of 5.00% Convertible SeniorNotes (equivalent to a conversion price of approximately $42.81 per share),subject to adjustment in the event of, among other things, a fundamental change(as defined in the indenture). We could have redeemed the 5.00% ConvertibleSenior Notes, in whole or in part, on or after October 6, 2008, and priorto October 1, 2010, for cash at a redemption price equal to 100% of theprincipal amount of 5.00% Convertible Senior Notes to be redeemed, plus anyaccrued and unpaid interest, if the closing price of our common stock exceeded130% of the conversion price over a specified period. On or afterOctober 1, 2010, we may redeem the 5.00% Convertible Senior Notes, inwhole or in part, at a redemption price equal to 100% of the principal amountof 5.00% Convertible Senior Notes to be redeemed, plus any accrued and unpaidinterest, irrespective of the price of our common stock. Holders may converttheir 5.00% Convertible Senior Notes at any time prior to the close of businesson the business day immediately preceding their stated maturity, and holdersmay, upon the occurrence of certain fundamental changes, or on October 1,2010, October 1, 2015, and October 1, 2020, require us to repurchase allor a portion of their 5.00% Convertible Senior Notes for cash in an amountequal to 100% of the principal amount of such 5.00% Convertible Senior Notes,plus any accrued and unpaid interest.

 

During2008 the Company repurchased $6 million, face value, of the 5.00% ConvertibleSenior Notes on the open market for $5.3 million. In 2009 the Companyrepurchased $25.7 million, face value, of the 5.00% Convertible Senior Notes onthe open market for $21.3 million, resulting in a gain on the earlyextinguishment of debt of $3.4 million after writing off deferred loan costs ofapproximately $1 million.  On February 1, 2010, Toreador consummatedan exchange transaction (the “Convertible Notes Exchange”). In the ConvertibleNotes Exchange, in exchange for (a) $22,231,000 principal amount of ouroutstanding 5.00% Convertible Senior Notes (the “Old Notes”) and (b) $9.4million cash, we issued $31,631,000 aggregate principal amount of our8.00%/7.00% Convertible Senior Notes, or the New Convertible Senior Notes, andpaid accrued and unpaid interest on the Old Notes.

 

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Asthe debt instruments exchanged in the Convertible Notes Exchange havesubstantially different terms, the Company recognized the exchange of the 5.00%Convertible Senior Notes as extinguishment of debt. As a result, for the ninemonths ended September 30, 2010, the Company recognized a loss of $4.3 millionincluding write off of loan original fee of $822,000 for the debtextinguishment. The New Convertible Senior Notes are recorded at a fair valueof $35,065,000 on the date of exchange. The accretion expense on theConvertible Notes Exchange, which was determined using fair market value of theNew Convertible Senior Notes, will be amortized to income over their term. Theaccretion impact (positive) of $348,430 was recorded for the nine months endedSeptember 30, 2010.

 

Asof September 30, 2010, approximately $32.4 million principal aggregate amountof the 5.00% Convertible Senior Notes was outstanding.

 

  OnOctober 1, 2010, holders of $32,256,000 principal amount of the 5.00%Convertible Senior Notes exercised their right to require the Company torepurchase their 5.00% Convertible Senior Notes in accordance with the terms ofthe indenture.  Following such repurchaseby the Company on October 1, 2010, $129,000 principal aggregate amount of the5.00% Convertible Senior Notes remained outstanding.  The Company has elected to redeem the$129,000 principal aggregate amount of the 5.00% Convertible Senior Notesoutstanding in accordance with the terms of the indenture, has provided noticeto the holders of such redemption and expects to effect this redemption onNovember 24, 2010.  For furtherinformation, see “Note 19 — Subsequent Events.”

 

**8.00%/7.00% CONVERTIBLE SENIOR NOTES DUE OCTOBER 1, 2025**

 

OnFebruary 1, 2010, Toreador consummated the Convertible Notes Exchange. Inthe Convertible Notes Exchange, in exchange for (a) the Old Notes and(b) $9.4 million cash, we issued $31,631,000 aggregate principal amount ofthe New Convertible Senior Notes and paid accrued and unpaid interest on theOld Notes. We incurred approximately $1.9 million of costs associated with theissuance of the New Convertible Senior Notes; these costs have been recorded inother assets on the balance sheets and are being amortized to interest expense usingthe straight-line interest rate method (which approximates the effectiveinterest method) over the term of the New Convertible Senior Notes (i.e., fromissuance to the earliest date on which holders may require the Company torepurchase all or a portion of their New Convertible Senior Notes, in this caseOctober 1, 2013).

 

TheNew Convertible Senior Notes are senior unsecured obligations of the Company,ranking equal in right of payment with the Company’s 5.00% Convertible SeniorNotes and future unsubordinated indebtedness. The New Convertible Senior Noteswill mature on October 1, 2025 and pay annual cash interest at 8.00% fromFebruary 1, 2010 until January 31, 2011 and at 7.00% per annumthereafter. Interest on the New Convertible Senior Notes will be payable onFebruary 1 and August 1 of each year, beginning on August 1,2010.

 

TheNew Convertible Senior Notes are convertible prior to February 1, 2011only if an event of default occurs and is continuing under the terms of theindenture, upon a change of control (as defined in the indenture) and to theextent the Company elects to redeem the New Convertible Senior Notes in a ProvisionalRedemption (as defined below). The New Convertible Senior Notes are convertibleat any time on or after February 1, 2011 and before the close of businesson October 1, 2025.

 

TheNew Convertible Senior Notes are convertible into shares of our common stock atan initial conversion rate of 72.9927 shares of common stock per $1,000principal amount of New Convertible Senior Notes (which is equivalent to aninitial conversion price of $13.70 per share), subject to adjustment uponcertain events. Under the terms of the indenture governing the New ConvertibleSenior Notes, if on or before October 1, 2010, we sold shares of ourcommon stock in an equity offering or an equity-linked offering (other than forcompensation), for cash consideration per share such that 120% of the issuanceprice was less than the conversion price of the New Convertible Senior Notesthen in effect, the conversion price was to be reduced to an amount equal to120% of such offering price. As a result of our February 2010 publicoffering, the conversion rate of the New Convertible Senior Notes adjusted to98.0392 shares of common stock per $1,000 principal amount of New ConvertibleSenior Notes (which is equivalent to a conversion price of approximately $10.20per share).  Pursuant to the indenture, the conversion price of the NewConvertible Senior Notes will not be further adjusted under such provisionbecause the proceeds from the public offering were in excess of $20 million.

 

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TheNew Convertible Senior Notes may be redeemed in whole or in part at the Company’soption prior to October 1, 2013, in cash at a redemption price equal toone hundred percent (100%) of the principal amount of the New ConvertibleSenior Notes redeemed, plus accrued and unpaid interest, if any, to, butexcluding, the redemption date plus a make-whole payment, if the closing saleprice of the Company’s common stock has exceeded 200% of the conversion pricethen in effect for at least twenty (20) trading days in any consecutive thirty(30)-trading day period ending on the trading day prior to the date of mailingof the relevant notice of redemption (a “Provisional Redemption”).  TheNew Convertible Senior Notes may be redeemed in whole or in part at the Company’soption on or after October 1, 2013 for cash at a redemption price equal to100% of the principal amount of the New Convertible Senior Notes redeemed, plusany accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of certain fundamental changes, or on each ofOctober 1, 2013, October 1, 2015 and October 1, 2020, a holdermay require the Company to repurchase all or a portion of the New ConvertibleSenior Notes in cash for 100% of the principal amount of the New ConvertibleSenior Notes to be purchased, plus any accrued and unpaid interest to, butexcluding, the purchase date.

 

Pursuantto the indenture, the Company and its subsidiaries may not incur debt otherthan Permitted Indebtedness. “Permitted Indebtedness” includes (i) the NewConvertible Senior Notes; (ii) the 5.00% Convertible Senior Notes or anyindebtedness of the Company that serves to refund or refinance the 5.00% ConvertibleSenior Notes (“Refinancing Debt”), so long as the principal amount of theRefinancing Debt does not exceed the outstanding principal amount of the 5.00%Convertible Senior Notes; (iii) indebtedness incurred by the Company orits subsidiaries not to exceed the sum of (i) the product of(x) $7.00 and (y) the number of barrels of proved plus probablereserves and (ii) cash equivalents less the aggregate principal amount ofthe New Convertible Senior Notes outstanding less the aggregate principal amountof the 5.00% Convertible Senior Notes less any Refinancing Debt;(iv) indebtedness that is nonrecourse to the Company or any of itssubsidiaries used to finance projects or acquisitions, joint ventures orpartnerships, including acquired indebtedness (“Nonrecourse Debt”); and(v) certain other customary categories of permitted debt. In addition, theCompany may not permit its total consolidated net debt as of any date to exceedthe product of (x) $7.00 and (y) the number of barrels of proved plusprobable reserves other than for Nonrecourse Debt. The proved plus probablereserves underlying any Nonrecourse Debt for which debt has been incurred aspermitted debt pursuant to clause (iv) above will be excluded from theproved plus probable reserves calculation for the purposes of the above debtcovenants.

 

**CHANGE IN AMORTIZATION OF ISSUE PREMIUM AND DEBT ISSUANCECOSTS**

 

TheCompany reviews the estimated lives of its assets and liabilities and relatedamortization period on an ongoing basis. This review indicated that theestimated amortization period of the Company’s issue premium and debt issuancecosts were deemed to be shorter than the previously assigned amortizationperiod. As a result, effective July 1, 2010, the Company changed its estimatesfor the amortization period of its issue premium and debt issuance costs toreflect the first put option date of the related callable debt. This change inestimate resulted from a change in the pattern of recognition of those expensesresulting from the repurchase option for the 5.00% Convertible Senior Notes onOctober 1, 2010.

 

Basedon this early redemption, the Company has decided that for a debt instrumentthat is puttable by the holder prior to the debt’s stated maturity date, it ispreferable to amortize the related issuance costs and purchase premium over aperiod no longer than through the first put option date. The issue premium onthe Convertible Notes Exchange and the costs associated with the issuance ofits convertible senior notes will now be amortized using the straight-line interestrate method (which approximates the effective interest method) over the term ofthe first puttable dates of these callable debts. In all prior periods, theissue premium and the debt issuance costs were amortized over the terms of thedebt issuance (i.e., October 1, 2025 for both the 5.00% Convertible SeniorNotes and the New Convertible Senior Notes). The effect of this change inestimate was to increase the interest expense by $1,260,060, increase theaccretion impact (positive) by $202,314 (or increase net loss for $1,057,746)and decrease basic and diluted earnings per share by $0.04 for the three monthsended September 30, 2010.

 

***Dividends***

 

Dividendson our common stock may be declared and paid out of funds legally availablewhen and as determined by our Board of Directors. Our policy is to hold andinvest corporate funds on a conservative basis, and, thus, we do not anticipatepaying cash dividends on our common stock in the foreseeable future.

 

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*** ***

***Contractual Obligations***

 

Thefollowing table sets forth our contractual obligations in thousands atSeptember 30, 2010 for the periods shown:

 
| ** **                    | ** ** | **Total** | ** ** | **Less Than  One Year** | ** ** | **One to  Three Years** | ** ** | **Four to  Five Years** | ** ** | **More Than  Five Years** | ** ** |
|-------------------------------|------------|-----------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| Long-term debt                |       | $         | 67,101     |                              | $          | 32,385                            |       | $                                 | 34,716     |                                | $          | — |   | $ | — |   |
| Asset retirement obligation   |       | 4,009     |       | —                            |       | —                            |       | 155                               |       | 3,854                               |       |
| Lease commitments             |       | 471       |       | 112                               |       | 359                               |       | —                            |       | —                              |       |
| Total contractual obligations |       | $         | 71,581     |                              | $          | 32,497                            |       | $                                 | 35,075     |                                | $          | 155 |   | $ | 3,854 |   |

 

Contractualobligations for long-term debt above does not include amounts for interestpayments.

** **

**CRITICAL ACCOUNTING POLICIES**

 

Thediscussion and analysis of our financial condition and results of operations isbased upon the consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. Our significant accounting policies are described in “Note 1 — SignificantAccounting Policies” to our consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2009. We haveidentified below policies that are of particular importance to the portrayal ofour financial position and results of operations and which require theapplication of significant judgment by management. We analyze our estimates ona periodic basis and base our estimates on experience and various otherassumptions that we believe to be reasonable under the circumstances. Actualresults may differ from these estimates using different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourfinancial statements:

 

***Successful Efforts Method of Accounting***

 

Weaccount for our oil and natural gas exploration and development activitiesutilizing the successful efforts method of accounting. Under this method, costsof productive exploratory wells, development dry holes and productive wells andundeveloped leases are capitalized. Oil and natural gas lease acquisition costsare also capitalized. Exploration costs, including personnel costs, certaingeological and geophysical expenses and delay rentals for oil and natural gasleases, are charged to expense as incurred. Exploratory drilling costs areinitially capitalized, but such costs are charged to expense if and when thewell is determined not to have found reserves in commercial quantities. In mostcases, a gain or loss is recognized for sales of producing properties.

 

Theapplication of the successful efforts method of accounting requires management’sjudgment to determine the proper designation of wells as either developmentalor exploratory, which will ultimately determine the proper accounting treatmentof the costs incurred. The results from a drilling operation can takeconsiderable time to analyze, and the determination that commercial reserveshave been discovered requires both judgment and application of industryexperience. Wells may be completed that are assumed to be productive and actuallydeliver oil and natural gas in quantities insufficient to be economic, whichmay result in the abandonment of the wells at a later date. On occasion, wellsare drilled which have targeted geologic structures that are both developmentaland exploratory in nature, and in such instances an allocation of costs isrequired to properly account for the results. Delineation seismic costsincurred to select development locations within a productive oil and naturalgas field are typically treated as development costs and capitalized, but oftenthese seismic programs extend beyond the proved reserve areas and thereforemanagement must estimate the portion of seismic costs to expense asexploratory. The evaluation of oil and natural gas leasehold acquisition costsrequires management’s judgment to estimate the fair value of exploratory costsrelated to drilling activity in a given area. Drilling activities in an area byother companies may also effectively condemn leasehold positions.

 

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Thesuccessful efforts method of accounting can have a significant impact on theoperational results reported when we enter a new exploratory area in hopes offinding oil and natural gas reserves. The initial exploratory wells may beunsuccessful and the associated costs will be expensed as dry hole costs.Seismic costs can be substantial which will result in additional explorationexpenses when incurred.

 

***Reserves Estimate***

 

Provedreserves are estimated quantities of oil and gas, which, by analysis ofgeoscience and engineering data, can be estimated with reasonable certainty tobe economically producible — from a given date forward recoverable in futureyears from known reservoirs, and under existing economic conditions, operatingmethods, and government regulations — prior to the time at which contractsproviding the right to operate expire, unless evidence indicates that renewalis reasonably certain. Proved developed reserves are reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods or in which the cost of the required equipment is relativelyminor compared to the cost of a new well and through installed extractionequipment and infrastructure operational at the time of the reserves estimateif the extraction is by means not involving a well. Proved undeveloped reservesare reserves that are expected to be recovered from new wells on undrilledacreage or from existing wells where a relatively major expenditure is requiredfor recompletion. Proved undeveloped reserves on undrilled acreage are limited(i) to those directly offsetting development spacing areas that are reasonablycertain of production when drilled, unless evidence using reliable technologyexists that establishes reasonable certainty of economic producibility atgreater distances and (ii) to other undrilled locations if a developmentplan has been adopted indicating that they are scheduled to be drilled withinfive years, unless the specific circumstances justify a longer time.

 

Probablereserves are those additional reserves that are less certain to be recoveredthan proved reserves but which, together with proved reserves, are as likely asnot to be recovered.  When deterministic methods are used, it is as likelyas not that actual remaining quantities recovered will exceed the sum ofestimated proved plus probable reserves. When probabilistic methods are used,there should be at least a 50% probability that the actual quantities recoveredwill equal or exceed the proved plus probable reserves estimates.  Probable reserves may be assigned to areas of a reservoir adjacent to provedreserves where data control or interpretations of available data are lesscertain, even if the interpreted reservoir continuity of structure orproductivity does not meet the reasonable certainty criterion. Probablereserves may be assigned to areas that are structurally higher than the provedarea if these areas are in communication with the proved reservoir. Probable reserves estimates also include potential incremental quantitiesassociated with a greater percentage recovery of the hydrocarbons in place thanassumed for proved reserves.

 

Possiblereserves are those additional reserves that are less certain to be recoveredthan probable reserves.  When deterministic methods are used, the totalquantities ultimately recovered from a project have a low probability ofexceeding proved plus probable plus possible reserves. When probabilisticmethods are used, there should be at least a 10% probability that the totalquantities ultimately recovered will equal or exceed the proved plus probableplus possible reserves estimates.  Possible reserves may be assigned toareas of a reservoir adjacent to probable reserves where data control andinterpretations of available data are progressively less certain. Frequently,this will be in areas where geoscience and engineering data are unable todefine clearly the area and vertical limits of commercial production from thereservoir by a defined project.  Possible reserves also includeincremental quantities associated with a greater percentage recovery of thehydrocarbons in place than the recovery quantities assumed for probablereserves.

 

Weemphasize that the volume of reserves are estimates that, by their nature aresubject to revision. The estimates are made using geological and reservoirdata, as well as production performance data. These estimates are reviewedannually and revised, either upward or downward, as warranted by additionalperformance data. These reserve revisions result primarily from improved or adecline in performance from a variety of sources such as an addition to or areduction in recoveries below or above previously established lowest knownhydrocarbon levels, improved or a decline in drainage from natural drivemechanisms, and the realization of improved or declined drainage areas. If theestimates of proved reserves were to decline, the rate at which we recorddepletion expense would increase.

 

Forthe year ended December 31, 2009, we had an upward reserve revision of 18.11%in total proved reserves. This increase can be correlated to a better long-termperformance of our main producing asset, the Neocomian Complex, and a higheroil price. The reserves at December 31, 2009 were priced at $56.99 per Bbl, ascompared to $34.29 at December 31, 2008.

 

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*** ***

***Impairment of Oil and Natural GasProperties***

 

Wereview our proved oil and natural gas properties for impairment on an annualbasis or whenever events and circumstances indicate a potential decline in therecoverability of their carrying value. We estimate the expected future cashflows from our proved oil and natural gas properties and compare these futurecash flows to the carrying value of the oil and natural gas properties todetermine if the carrying value is recoverable. If the carrying value exceedsthe estimated undiscounted future cash flows, we will adjust the carrying valueof the oil and natural gas properties to its fair value in the current period.The factors used to determine fair value include, but are not limited to,estimates of reserves, future commodity prices, future production estimates,anticipated capital expenditures, and a discount rate commensurate with therisk associated with realizing the expected cash flows projected. Unprovedproperties are reviewed quarterly to determine if there has been impairment ofthe carrying value, with any such impairment charged to expense in the period.Given the complexities associated with oil and natural gas reserves estimateand the history of price volatility in the oil and natural gas markets, eventsmay arise that will require us to record an impairment of our oil and naturalgas properties and there can be no assurance that such impairments will not berequired in the future nor that they will not be material.

 

OnMay 1, 2009, the Prime Minister of Turkey, announced a 25.00% reduction inthe posted price of natural gas in Turkey which caused us to reevaluate thefair value of our SASB and for management to estimate that the fair value ofthe asset has been impaired by approximately $5.3 million at September 30,2009; accordingly, recorded an impairment to reflect this change in fair value.

 

Werecorded no impairment in the nine months ended September 30, 2010.

 

***Future Development and Abandonment Costs***

 

Futuredevelopment costs include costs to be incurred to obtain access to provedreserves, including drilling costs and the installation of productionequipment. Future abandonment costs include costs to dismantle and relocate ordispose of our production equipment, gathering systems, wells and relatedstructures and restoration costs of land. We develop estimates of these costsfor each of our properties based upon the type of production structure, depthof water, reservoir characteristics, depth of the reservoir, market demand forequipment, currently available procedures and consultations with constructionand engineering consultants. Because these costs typically extend many yearsinto the future, estimating these future costs is difficult and requiresmanagement to make estimates and judgments that are subject to future revisionsbased upon numerous factors, including changing technology, the ultimatesettlement amount, inflation factors, credit adjusted discount rates, timing ofsettlement and changes in the political, legal, environmental and regulatoryenvironment. We review our assumptions and estimates of future abandonmentcosts on an annual basis. The accounting for future abandonment costs changedon January 1, 2003, with the adoption of FASB ASC 410 “Asset Retirementand Environmental Obligations”. ASC 410 requires that the fair value of aliability for an asset retirement obligation be recorded in the period in whichit is incurred and the corresponding cost be capitalized by increasing thecarrying amount of the related long-lived asset. The liability is accreted toits present value each period, and the capitalized cost is depreciated over theuseful life of the related asset. If the liability is settled for an amountother than the recorded amount, a gain or loss is recognized. In 2005, twoseparate incidents occurred offshore Turkey in the Black Sea, which resulted inthe sinking of the Fallen Structures and the loss of three natural gas wells.We have not been requested, or ordered by any governmental or regulatory body,to remove the Fallen Structures. Therefore, we believe it is unlikely that wewill receive such a request or order, and no liability has been recorded.

 

Holdingall other factors constant, if our estimate of future abandonment costs isrevised upward, earnings would decrease due to higher depreciation, depletionand amortization expense. Likewise, if these estimates were revised downward,earnings would increase due to lower depreciation, depletion and amortizationexpense.

 

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***Income Taxes***

 

Forfinancial reporting purposes, we generally provide taxes at the rate applicablefor the appropriate tax jurisdiction. Because our present intention is toreinvest the unremitted earnings in our foreign operations, we do not provideU.S. income taxes on unremitted earnings of foreign subsidiaries. Managementperiodically assesses the need to utilize these unremitted earnings to financeour foreign operations. This assessment is based on cash flow projections thatare the result of estimates of future production, commodity prices andexpenditures by tax jurisdiction for our operations. Such estimates areinherently imprecise since many assumptions utilized in the cash flowprojections are subject to revision in the future.

 

Managementalso periodically assesses, by tax jurisdiction, the probability of recovery ofrecorded deferred tax assets based on its assessment of future earningsestimates. Such estimates are inherently imprecise since many assumptionsutilized in the assessments are subject to revision in the future.

 

***Derivatives***

 

Weperiodically utilize derivatives instruments such as futures and swaps forpurposes of hedging our exposure to fluctuations in the price of crude oilsales. In accordance with FASB ASC 815, “Derivatives and Hedging,” we haveelected not to designate the derivative financial instruments to which we are aparty as hedges, and accordingly, we record such contracts at fair value as anasset or a liability and recognize changes in such fair value in currentearnings as they occur. We determine the fair value of futures and swapcontracts based on the difference between their fixed contract price and theunderlying market price at the determination date. The realized and unrealizedgains and losses on derivatives are recorded as a derivative fair value gain orloss in the income statement.

 

***Foreign Currency Translation***

 

Thefunctional currency for France is the Euro. Translation gains and lossesresulting from transactions in Euros are included in other comprehensive incomefor the current period. We periodically review the operations of our entitiesto ensure the functional currency of each entity is the currency of the primaryeconomic environment in which we operate.

** **

**RESULTS OF OPERATIONS**

 

***COMPARISON OF THE THREE MONTHS ENDEDSEPTEMBER 30, 2010 AND 2009***

 

Thediscussion below, with the exception of the discussion under the heading “DiscontinuedOperations,” relates to our corporate activities in the United States andFrance and oil exploration and production operations in France. Certainprior-year amounts have been reclassified and adjusted to present the operationsof Turkey, Hungary and Romania as discontinued operations and are discussedunder the heading “Discontinued Operations.”

 
| ** **         | ** ** | **For the Three Months Ended** | ** ** |
|--------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **September 30,**                             | ** ** |
| ** **         | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| **Production:**    |       |                                               |       |   |   |
| Oil (MBbls):       |       |                                               |       |   |   |
| France             |       | 81                                                 |       | 83 |   |
|               |       |                                               |       |   |   |
| ** **         | ** ** | **For the Three Months Ended** | ** ** |
| ** **         | ** ** | **September 30,**                             | ** ** |
| ** **         | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| **Average Price:** |       |                                               |       |   |   |
| Oil ($/Bbl):       |       |                                               |       |   |   |
| France             |       | $                                                  | 77.67      |   | $ | 62.19 |   |
|                    |            |                                                    |            |  |  |  |  |

 

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***Revenue and other income***

 

*Sales and other operating revenue*

 

Salesand other operating revenue for the three months ended September 30, 2010 was$6.0 million, as compared to sales and other operating revenue of $5.2 millionfor the three months ended September 30, 2009, an increase primarily due to theincrease in global oil prices over the period, which led to an increase in theprices at which we sell our oil from an average of $62.19 per barrel in thethree months ended September 30, 2009 to an average of $77.67 per barrel in thethree months ended September 30, 2010.  Production remained relativelystable, decreasing from 83 MBbls in the three months ended September 30, 2009to 81 MBbls in the three months ended September 30, 2010.

 

Theabove table compares both volumes and prices received for oil for the threemonths ended September 30, 2010 and 2009. Oil prices have been very volatileover the third quarter of 2010, and we expect will continue to be extremelyvolatile for the remainder of the fiscal year 2010.  The results of ouroperations are highly dependent upon the prices received from our oilproduction, which are dependent on numerous factors beyond our control. Accordingly, significant changes to oil prices are likely to have a materialimpact on our financial condition, results of operation, cash flows andrevenue.

 

*Other income*

 

Otherincome includes all personal general and administrative costs associated withTEF’s activities as operator of the exploration permits in the Paris Basin,which TEF is entitled to invoice to Hess under the Investment Agreement. As ofSeptember 30, 2010, $560,000 was invoiced to Hess and recorded as “Other income.”

 

***Operating costs and expenses***

 

*Lease operating expense*

 

Leaseoperating expense was $3.0 million, or $36.76 per BOE produced, for the threemonths ended September 30, 2010, as compared to $1.5 million, or $18.07 per BOEproduced, for the three months ended September 30, 2009.

 

Thisincrease is mainly due to the reclassification of certain costs associated withparticular properties as lease operating expenses including (i) $280,000relating to certain taxes associated with oil production and (ii) approximately$1.1 million relating to costs associated with production sites and additionalParis headquarter expenses (which in the three months ending September 30, 2009were classified as general and administrative expenses, but following theformation of the strategic partnership with Hess are now mainly incurred inconnection with our existing oil production and conventional reservoirsdevelopment and therefore have been reclassified as lease operating expenses).Lease operating expense for the three months ended September 30, 2010 alsoincluded expense due to crude oil inventory decrease for an amount of $134,000.

 

*Exploration expense*

 

Explorationexpense for the three months ended September 30, 2010 was $201,000, as comparedto $22,000 for the three months ended September 30, 2009. This increase is dueprimarily to expenses associated with geological and technical studies theCompany conducted and commissioned in connection with the exploration of theParis Basin and not invoiced to Hess.

 

*Depreciation, depletion and amortization*

 

Depreciation,depletion and amortization for the three months ended September 30, 2010 was$1.1 million or $14.00 per BOE produced, as compared to $1.3 million or $16.87per BOE produced for the three months ended September 30, 2009. Thisdecrease is due to a longer production life estimate for our existing wellsaccording to a Gaffney, Cline & Associates Ltd. report of our reserves atDecember 31, 2009.

 

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*Accretion on discounted assets and liabilities*

 

Accretionexpense for the three months ended September 30, 2010 was $246,000(positive) as compared to $127,000 for the three months ended September 30,2009.  The accretion expense is composed of $11,000 as asset retirementobligation expense and $257,000 of accretion impact (positive) related to thefair value of the New Convertible Senior Notes.

 

*General and administrative before stock compensation* expense

 

Generaland administrative expense, excluding stock compensation expense, for the threemonths ended September 30, 2010 totaled $1.4 million, as compared to $3.5million for the comparable period in 2009. This decrease is due to the effort startedin 2009 to reduce general and administrative expense as well as to areclassification of certain oil production related expenses from general andadministrative expenses to lease operating expenses.

 

*Stock compensation expense*

 

Stockcompensation expense was $0.4 million for the three months ended September 30,2010 compared with $0.6 million for the three months ended September 30,2009.

 

*Impairment of oil and gas properties*

 

Therewere no impairment charges for the three months ended September 30, 2010and September 30, 2009.

 

*Loss on oil and gas derivative contracts*

 

Werecorded an unrealized loss on oil and gas derivative contracts for the threemonths ended September 30, 2010 of $105,000 (as compared to an unrealizedincome of  $7,000 in the three monthsended September 30, 2009) representing the unrealized loss on thecommodity derivative contracts with Vitol Trading.  This increase in lossis due to an increase in oil prices over the third quarter of 2010.  Presented in the table below is a summary ofthe contract entered into:

 
| **Type** | ** ** | **Period**                                     | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Unrealized loss for  the three months  ended September  30, 2010** | ** ** |
|----------|------------|------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------------------------------------------------------------------------------------------------|------------|
|     |       |                                           |       |        |       |      |       |        |       |                                                                                               |       |
| Collar   |       | January 1,  2010 - December 31, 2010 |       | 182,500     |       | $         | 68.00      |        | $          | 81.00                                                                                              |       | $ | 105 |   |
|          |            |                                                |            |             |            |           |            |             |            |                                                                                                    |            |  |  |  |

 

*Foreign currency exchange gain (loss)*

 

Werecorded a loss on foreign currency exchange of $1.2 million for the threemonths ended September 30, 2010 compared with a loss of $0.0 million forthe three months ended September 30, 2009. This increase is mainly due tothe fact that Toreador Energy France booked a loss on foreign currency exchangein its statutory accounts in Euro over the three months ended September 30,2010 due to the receipt on June 10, 2010 of the $15 million upfrontpayment from Hess under the Investment Agreement combined with the weakening ofthe U.S. dollar compared to the Euro over the same period (this loss havingbeen recorded in the financial statements of the Company for the third quarterof  2010 in accordance with FAS 52 “ForeignCurrency Translation”).

 

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*Interest expense, net of capitalized interest*

 

Interestexpense, net of capitalized interest was $2.7 million for the three monthsended September 30, 2010 as compared to $0.4 million for the three monthsended September 30, 2009.  The increase is mainly due to theadditional interest payments relating to the New Convertible Senior Notesissued in February 2010, which was offset by decreased interest paymentsrelating to the 5.00% Convertible Senior Notes, of which $22.2 million of theaggregate principal amount outstanding were exchanged for a portion of the NewConvertible Senior Notes in the Convertible Notes Exchange.  Interestexpense for the New Convertible Senior Notes was $633,000 for the three monthsended September 30, 2010 as compared to zero for the three months ended September 30,2009.  Interest expense for the 5.00% Convertible Senior Notes was$404,000 for the three months ended September 30, 2010 as compared to$795,000 for the three months ended September 30, 2009.  Amortizationof $1,310,058 was recorded for the three months ended September 30, 2010compared to $38,000 for the three months ended September 30, 2009, due tothe change in estimate of the lives of the issue premium and debt issuancecosts associated to 5.00% Convertible Senior Notes and to the New ConvertibleSenior Notes (See Note 5 — “Change in Depreciable Lives of Issue Premium and DebtIssuance Costs”).

 

*Income tax (benefit) provision*

 

Anincome tax benefit of $0.7 million was recorded in the three months ended September 30,2010, compared to a tax benefit of $0.2 million recognized for the three monthsended September 30, 2009. This benefit was due to the excess of provisionfor income tax payable in France recorded in the second quarter of 2010.

 

*Discontinued operations*

 

Inthe fourth quarter of 2008 and during the first quarter of 2009, Toreadorfarmed out or sold all of its working interests in Romania to three differentcompanies and closed its office; thus, we no longer have any operationalinvolvement in Romania. This resulted in a gain of $5.8 million, which wasrecorded in the first quarter of 2009.

 

OnMarch 3, 2009 we completed the sale of a 26.75% interest in the SouthAkcakoca Sub-Basin (SASB) project associated licenses located in the Black Seaoffshore Turkey, to Petrol Ofisi for $55 million. In accordance with therevised assignment announced on February 3, 2009, $50 million of theproceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining $5million was paid on September 1, 2009. There was no gain or loss resultingfrom this sale.

 

OnSeptember 30, 2009, the Company entered into a Share Purchase Agreement(the “Share Purchase Agreement”) with Tiway Oil BV, a company organized underthe laws of the Netherlands (“Tiway”), and Tiway Oil AS, a company organizedunder the laws of Norway, pursuant to which the Company agreed to sell 100% ofthe outstanding shares of Toreador Turkey Ltd. to Tiway for total considerationconsisting of: (1) a cash payment of $10.5 million to be paid at closing,(2) exploration success payments dependent upon certain future commercialdiscoveries as provided in the Share Purchase Agreement, up to a maximumaggregate consideration of $40 million, and (3) future quarterly 10%pre-tax net profit interest payments if a field goes into production that wasdiscovered by an exploration well drilled within four years of closing oncertain of the licenses then still held by Tiway. The sale of Toreador TurkeyLtd. was completed on October 7, 2009 and resulted in a gain of $1.8million.

 

OnSeptember 30, 2009, the Company entered into a Quota Purchase Agreement(the “Quota Purchase Agreement”) with RAG (Rohöl AufsuchungsAktiengesellschaft), a corporation organized under the laws of Austria (“RAG”),pursuant to which the Company agreed to sell 100% of its equity interests inToreador Hungary Limited to RAG for total consideration consisting of(1) a cash payment of $5.4 million (€ 3.7 million) paid at closing,(2) $435,000 (€ 300,000), which was held back subject to a post-closingadjustment and was paid to us on November 5, 2009 and (3) acontingent payment of $2.9 million (€2 million) to be paid uponpost-transaction completion of agreements relating to certain assets ofToreador Hungary. The sale of Toreador Hungary was completed onSeptember 30, 2009 and resulted in a loss of $4.1 million.

 

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The results of operations of assets inRomania, Turkey and Hungary have been presented as discontinued operations inthe accompanying consolidated statement of operations.  Results for theseassets reported as discontinued operations were as follows:

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
|                                                                   | ** ** | **September 30,**           | ** ** |
| ** **                                                             | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Revenue and other income                                               |       |                             |       |   |   |
| Sales and other operating revenue                                      |       | $                                | —     |   | $ | 1,632 |   |
| Operating costs and expenses:                                          |       |                             |       |   |   |
| Lease operating expense                                                |       | —                           |       | 381 |   |
| Exploration expense                                                    |       | —                           |       | 136 |   |
| Dry hole costs                                                         |       | —                           |       | 1,318 |   |
| Depreciation, depletion and amortization                               |       | —                           |       | 52 |   |
| Accretion on discounted assets and liabilities                         |       | —                           |       | — |   |
| Impairment of oil and natural gas properties                           |       | —                           |       | 5,425 |   |
| General and administrative expense                                     |       | 106                              |       | 1,720 |   |
| (Gain) loss on sale of properties and other assets                     |       | —                           |       | 4,171 |   |
| Total operating costs and expenses                                     |       | —                           |       | 13,203 |   |
| Operating loss                                                         |       | (106                             | )          | (11,571 | ) |
| Other income (expense)                                                 |       |                             |       |   |   |
| Foreign currency exchange gain                                         |       | —                           |       | 1,190 |   |
| Interest and other income                                              |       | —                           |       | 18 |   |
| Loss on early extinguishment of debt — revolving  credit facility |       | —                           |       | — |   |
| Other expense                                                          |       | 81                               |       | — |   |
| Interest expense, net of interest capitalized                          |       | —                           |       | (155 | ) |
| Loss before income taxes                                               |       | (187                             | )          | (10,518 | ) |
| Income tax provision                                                   |       | (104                             | )          | — |   |
| Net loss from discontinued operations                                  |       | $                                | (291       | ) | $ | (10,518 | ) |

 

Wehad no sales and other operating revenue from discontinued operations for thethree months ended September 30, 2010 due to the sale of all ourdiscontinued operations in 2009.  We recorded in discontinued operationsfor the three months ended September 30, 2010 the following expenses: $106,000of general administrative expense due to legal costs associated to the Netherbydispute, $81,000 for payments made to Hunnisett and Barker in connection withthe Overriding Royalty and $104,000 of additional tax related to ToreadorHungary Limited activities in 2009. We thus recorded a loss of $291,000 fomdiscontinued operations in the three months ending September 30, 2010.

 

Thefollowing tables present production and average unit prices for Turkey:

 
| ** **      | ** ** | **For the Three Months Ended** | ** ** |
|-----------------|------------|----------------------------------------------------|------------|
| ** **      | ** ** | **September 30,**                             | ** ** |
| ** **      | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| **Production:** |       |                                               |       |   |   |
| Oil (MBbls):    |       |                                               |       |   |   |
| Turkey          |       | —                                             |       | 14 |   |
| Gas (MMcf):     |       |                                               |       |   |   |
| Turkey          |       | —                                             |       | 105 |   |
| MBOE:           |       |                                               |       |   |   |
| Turkey          |       | —                                             |       | 32 |   |

 

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| ** **              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                             | ** ** |
| ** **              | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| **Average Price:** |       |                                               |       |   |   |
| Oil ($/Bbl):            |       |                                               |       |   |   |
| Turkey                  |       | —                                             |       | $ | 58.65 |   |
| Gas ($/Mcf):            |       |                                               |       |   |   |
| Turkey                  |       | —                                             |       | $ | 7.62 |   |
| $/BOE:                  |       |                                               |       |   |   |   |
| Turkey                  |       | —                                             |       | $ | 51.52 |   |

 

***Other comprehensive income***

 

Themost significant element of comprehensive income, other than net income, isforeign currency translation. For the three months ended September 30,2010, we had accumulated an unrealized income of $7.3 million as compared to anunrealized loss of $2.0 million for the comparable period in 2009.  Thischange is primarily due to the weakening of the U.S. dollar compared to theEuro for the three months ended September 30, 2010 compared to the threemonths ended September 30, 2009.

 

Thefunctional currency of our operations in France is the Euro. The functionalcurrency in Turkey and Hungary was the U.S. dollar. The exchange rates at September 30,2010 and September 30, 2009 were:

 
| ** **       | ** ** | **September 30,** | ** ** |
|------------------|------------|------------------------|------------|
| ** **       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Euro             |       | $                      | 1.3648     |   | $ | 1.4643 |   |
| New Turkish Lira |       | —                 |       | $ | 0.0674 |   |
| Hungarian Forint |       | —                 |       | $ | 0.0054 |   |
|                  |            |                        |            |  |  |  |  |

 

***COMPARISON OF THE NINE MONTHS ENDEDSEPTEMBER 30, 2010 AND 2009***

 

Thefollowing tables present production and average unit prices for the geographicsegments indicated:

 
| ** **      | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------|------------|---------------------------------------------------|------------|
| ** **      | ** ** | **September 30,**                            | ** ** |
| ** **      | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| **Production:** |       |                                              |       |   |   |
| Oil (MBbls):    |       |                                              |       |   |   |
| France          |       | 241                                               |       | 248 |   |

 
| ** **         | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------|------------|---------------------------------------------------|------------|
| ** **         | ** ** | **September 30,**                            | ** ** |
| ** **         | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| **Average Price:** |       | ** **                                        |       |   |   |
| Oil ($/Bbl):       |       |                                              |       |   |   |
| France             |       | $                                                 | 74.81      |   | $ | 51.93 |   |
|                    |            |                                                   |            |  |  |  |  |

 

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***Revenue***

 

*Sales and other operating revenue*

 

Salesand other operating revenue for the nine months ended September 30, 2010were $17.5 million, as compared to $13.1 million for the nine months ended September 30,2009.  This increase is primarily due to the global increase in oilprices, which led to an increase in the prices at which we sell our oil from anaverage of $51.93 per barrel in the nine months ended September 30, 2009to an average of $74.81 per barrel in the nine months ended September 30,2010.

 

Theabove table compares both volumes and prices received for oil for the ninemonths ended September 30, 2010 and 2009. Oil prices have been veryvolatile over the nine months ended September 30, 2010, and we expect willcontinue to be extremely volatile for the remainder of the fiscal year 2010. The results of our operations are highly dependent upon the prices receivedfrom our oil production, which are dependent on numerous factors beyond ourcontrol.  Accordingly, significant changes to oil prices are likely tohave a material impact on our financial condition, results of operation, cashflows and revenue.

 

*Other income*

 

Otherincome for the nine months ended September 30, 2010 was $15.6 million,which represented (i) the $15 million upfront payment received from Hesson June 10, 2010 under the Investment Agreement and (ii) $560,000invoiced to Hess under the terms of the Investment Agreement for all personalgeneral and administrative costs associated with its activities as operator ofthe exploration permits in the Paris Basin, compared to $121,000 recorded forthe same period of 2009 related to the sale of a royalty interest in producingproperties located in Canada. These properties had a zero cost basis and wereacquired in connection with the acquisition of Madison Oil in 2003.

 

***Costs and expenses***

 

*Lease operating expense*

 

Leaseoperating expense was $7.3 million, or $30.42 per BOE produced, for the ninemonths ended September 30, 2010, as compared to $5.0 million, or $20.16per BOE produced for the nine months ended September 30, 2009.

 

Thisincrease is mainly due to the reclassification of certain costs associated withparticular properties as lease operating expenses including (i) $848,000relating to taxes associated with oil production and (ii) approximately$1.6 million in the aggregate relating to costs associated with productionsites and additional Paris headquarter expenses (which in the nine months ending September 30, 2009 were classifiedas general and administrative expenses, but following formation of thestrategic partnership with Hess are mainly incurred in connection with ourexisting oil production and conventional reservoirs development and thereforereclassified as lease operating expenses). In addition, lease operating expensefor the nine months ended September 30, 2010 also included expense due tocrude oil inventory decrease for an amount of $336,000.

 

*Exploration expense*

 

Explorationexpense for the nine months ended September 30, 2010 was $1.3 million, ascompared to $130,000 for the nine months ended September 30, 2009. Thisincrease is due primarily to expenses associated with geological and technicalstudies the Company conducted and commissioned in connection with the shale oildevelopment project.

 

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*Depreciation, depletion and amortization*

 

Depreciation,depletion and amortization for the nine months ended September 30, 2010was $2.8 million compared to $4.2 million for the nine months ended September 30,2009.  This decrease is due to a longer production life estimate for ourexisting wells according to a Gaffney, Cline & Associates Ltd. reportof our reserves at December 31, 2009.

 

*Accretion expense*

 

Accretionexpense for the nine months ended September 30, 2010 was $159,000(positive) as compared to $365,000 for the nine months ended September 30,2009.  The accretion expense is composed of $189,000 as asset retirementobligation expense and $348,000 of accretion impact (positive) related to thefair value of the 8.00%/7.00% Convertible Senior Notes.

 

*Impairment of oil and gas properties*

 

We incurred no impairment charge for the ninemonths ended September 30, 2010. For the nine months ended, September 30,2009, we recorded impairment to oil and gas properties totaling $5.3 million.We review our proved and unproved oil and natural gas properties for impairmenton an annual basis or whenever events and circumstances indicate a potentialdecline in the recoverability of their carrying value. For the period ended September 30,2009, the impairment of $5.3 million (which is recorded in discontinuedoperations) is a result of a decline in the fair market value of the Company’sinterest in South Akcakoca Sub-Basin asset in Turkey. The fair market valuedeclined during the first quarter of 2009 due to a 25.00% reduction in theposted sales price of natural gas produced in Turkey announced on May 1,2009.

 

*General and administrative before stock compensation expense*

 

General and administrative expense, excludingstock compensation expense, was $7.0 million for the nine months ended September 30,2010 compared to $11.8 million for the nine months ended September 30,2009. This decrease is due to the effort started in 2009 to reduce general andadministrative expense as well as to the reclassification of certain oilproduction related expenses to lease operating expenses. In addition, the generaland administrative expense for 2009 also included costs associated with the relocationof corporate headquarters, subsidiary sales and resignation of former officers.

 

*Stock compensation expense*

 

Stockcompensation expense was $2.6 million for the nine months ended September 30,2010 compared to $2.8 million for the nine months ended September 30,2009.  Stock compensation expense includes directors annual stock grantingof immediately vested shares for $650,000.

 

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*Gain on oil and gas derivative contracts*

 

Gainon oil and gas derivative contracts for the nine months ended September 30,2010 was $ 709,000 (as compared to an unrealized income of $7,000 for the ninemonths ended September 30, 2009) representing the unrealized gain on thecommodity derivative contracts with Vitol Trading. We had derivative contractscovering only the period from July 1 to December 31 in 2009.Presented in the table below is a summary of the contract entered into:

 
| **Type**   | ** ** | **Period**                                | ** ** | **Barrels** | ** ** | **Floor**  | ** ** | **Ceiling** | ** ** | **Unrealized gain for  nine months  September 30, 2010** | ** ** |
|------------|------------|-------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-----------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                                | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **                                                                        | ** ** |
| Collar     |       | January  1, 2010 - December 31, 2010 |       | 182,500     |       | $          | 68.00      |        | $          | 81.00                                                                             |       | $ | (709 | ) |
|            |            |                                           |            |             |            |            |            |             |            |                                                                                   |            |  |  |  |

 

*Foreign currency exchange gain (loss)*

 

Werecorded a loss on foreign currency exchange of $1.3 million for the ninemonths ended September 30, 2010 compared with a gain of $0.1 for the ninemonths ended September 30, 2009. This increase is mainly due to the factthat Toreador Energy France booked a loss on foreign currency exchange in itsstatutory accounts in Euro over the three months ended September 30, 2010due to the receipt on June 10, 2010 of the $15 million upfront paymentfrom Hess under the Investment Agreement combined with the weakening of theU.S. dollar compared to the Euro over the same period (this loss having beenrecorded in the financial statements of the Company for the third quarterof  2010 in accordance with FAS 52 “ForeignCurrency Translation”).

 

*Loss (gain) on the early extinguishment of debt*

 

Werecorded a loss of $4.3 million on the early extinguishment of debt compared toa gain of $3.4 million for the nine months ended nine months ended September 30,2009. This loss occurred following the Convertible Notes Exchange on February 1,2010. In 2009 the Company repurchased $25.7 million face value of the 5.00%Convertible Senior Notes on the open market for $21.3 million, resulting in again on the early extinguishment of debt of $3.4 million after writing offdeferred loan costs of approximately $1 million.

 

*Interest expense, net of capitalized interest*

 

Interestexpense, net of capitalized interest was $4.4 million for the nine months endedSeptember 30, 2010, as compared to $1.8 million for the nine months ended September 30,2009. The increase is mainly due to the interest payments relating to the NewConvertible Senior Notes issued in February 2010, which was offset bydecreased interest payments relating to the 5.00% Convertible Senior Notes, ofwhich $22.2 million of the aggregate principal amount outstanding wereexchanged for a portion of the New Convertible Senior Notes in the ConvertibleNotes Exchange. Interest expense for the New Convertible Senior Notes was$1,687,000 for the nine months ended September 30, 2010 as compared tozero for the nine months ended September 30, 2009.  Interest expensefor the 5.00% Convertible Senior Notes was $1,307,000 for the nine months endedSeptember 30, 2010 as compared to $2,611,000 for the nine months ended September 30,2009. Amortization of $1,408,522 was recorded for the period ended September 30,2010 compared to $145,280 for the period ended September 30, 2009, due tothe change in estimate of the lives of the issue premium and debt issuancecosts associated to 5.00% Convertible Senior Notes and to the New ConvertibleSenior Notes (See Note 5 — “Change in Depreciable Lives of Issue Premium andDebt Issuance Costs”).

 

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*Income tax (benefit) provision*

 

Anincome tax provision of $5.7 million was recorded in the nine months ended September 30,2010, compared to a tax benefit of $1.0 million recognized for the nine monthsended September 30, 2009. This increase is due to the provision for incometax payable in France for the year ended December 31, 2010 as a result ofthe $15 million upfront payment from Hess under the Investment Agreementtogether with earnings estimate for operations in France based on oilproduction activity.

 

*Discontinued operations*

 

Inthe fourth quarter of 2008 and during the first quarter of 2009, Toreadorfarmed out or sold all of its working interests in Romania to three differentcompanies and closed its office; thus, we no longer have any operationalinvolvement in Romania. This resulted in a gain of $5.8 million, which wasrecorded in the first quarter of 2009.

 

OnMarch 3, 2009 we completed the sale of a 26.75% interest in the SouthAkcakoca Sub-Basin (SASB) project associated licenses located in the Black Seaoffshore Turkey, to Petrol Ofisi for $55 million. In accordance with therevised assignment announced on February 3, 2009, $50 million of theproceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining $5million was paid on September 1, 2009. There was no gain or loss resultingfrom this sale.

 

OnSeptember 30, 2009, the Company entered into the Share Purchase Agreementwith Tiway, and Tiway Oil AS, a company organized under the laws of Norway,pursuant to which the Company agreed to sell 100% of the outstanding shares ofToreador Turkey Ltd. to Tiway for total consideration consisting of: (1) acash payment of $10.5 million to be paid at closing, (2) explorationsuccess payments dependent upon certain future commercial discoveries asprovided in the Share Purchase Agreement, up to a maximum aggregateconsideration of $40 million, and (3) future quarterly 10% pre-tax netprofit interest payments if a field goes into production that was discovered byan exploration well drilled within four years of closing on certain of thelicenses then still held by Tiway. The sale of Toreador Turkey Ltd. wascompleted on October 7, 2009 and resulted in a gain of $1.8 million.

 

OnSeptember 30, 2009, the Company entered into the Quota Purchase AgreementRAG, pursuant to which the Company agreed to sell 100% of its equity interestsin Toreador Hungary Limited to RAG for total consideration consisting of(1) a cash payment of $5.4 million (€ 3.7 million) paid at closing,(2) $435,000 (€ 300,000), which was held back subject to a post-closingadjustment and was paid to us on November 5, 2009 and (3) acontingent payment of $2.9 million (€2 million) to be paid uponpost-transaction completion of agreements relating to certain assets ofToreador Hungary. The sale of Toreador Hungary was completed onSeptember 30, 2009 and resulted in a loss of $4.1 million.

 

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The results of operations of assets inRomania, Turkey and Hungary have been presented as discontinued operations inthe accompanying consolidated statement of operations.  Results for theseassets reported as discontinued operations were as follows:

 
| ** **                                                             | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**          | ** ** |
| ** **                                                             | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Revenue and other income                                               |       |                            |       |   |   |
| Sales and other operating revenue                                      |       | $                               | —     |   | $ | 4,545 |   |
| Operating costs and expenses:                                          |       |                            |       |   |   |
| Lease operating expense                                                |       | —                          |       | 886 |   |
| Exploration expense                                                    |       | —                          |       | 868 |   |
| Dry hole costs                                                         |       | —                          |       | 1,318 |   |
| Depreciation, depletion and amortization                               |       | —                          |       | 157 |   |
| Accretion on discounted assets and liabilities                         |       | —                          |       | — |   |
| Impairment of oil and natural gas properties                           |       | —                          |       | 10,725 |   |
| General and administrative expense                                     |       | 763                             | (1)        | 3,424 |   |
| (Gain) loss on sale of properties and other assets                     |       | —                          |       | (1,675 | ) |
| Total operating costs and expenses                                     |       | 763                             |       | 15,703 |   |
| Operating loss                                                         |       | (763                            | )          | (11,158 | ) |
| Other income (expense)                                                 |       |                            |       |   |   |
| Foreign currency exchange gain                                         |       | —                          |       | 3,822 |   |
| Interest and other income                                              |       | —                          |       | 414 |   |
| Loss on early extinguishment of debt — revolving  credit facility |       | —                          |       | (4,881 | ) |
| Other expense                                                          |       | 246                             |       | — |   |
| Interest expense, net of interest capitalized                          |       | —                          |       | (185 | ) |
| Loss before income taxes                                               |       | (1,009                          | )          | (11,988 | ) |
| Income tax provision                                                   |       | (104                            | )          | — |   |
| Net loss from discontinued operations                                  |       | $                               | (1,113     | ) | $ | (11,988 | ) |

 

Wehad no sales and other operating revenue from discontinued operations for thenine months ending September 30, 2010 due to the sale of all ourdiscontinued operations in 2009.  For the nine months ending September 30,2010, we recorded $763,000 as general and administrative expense associatedwith the payment made to Scowcroft under the Settlement Agreement on April 30,2010 and associated legal costs, $246,000 for legal costs associated to theNetherby dispute and payments made to Hunnisett and Barker with respect to the OverridingRoyalty, and $104,000 of additional tax associated with Toreador HungaryLimited activities in 2009. We thus recorded a loss of $1.1 million fromdiscontinued operations for the nine months ending September 30, 2010.

 

Thefollowing tables present production and average unit prices for Turkey:

 
| ** **      | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------|------------|---------------------------------------------------|------------|
| ** **      | ** ** | **September 30,**                            | ** ** |
| ** **      | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| **Production:** |       |                                              |       |   |   |
| Oil (MBbls):    |       |                                              |       |   |   |
| Turkey          |       | —                                            |       | 39 |   |
| Gas (MMcf):     |       |                                              |       |   |   |
| Turkey          |       | —                                            |       | 301 |   |
| MBOE:           |       |                                              |       |   |   |
| Turkey          |       | —                                            |       | 89 |   |

 

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| ** **              | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                            | ** ** |
| ** **              | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| **Average Price:** |       |                                              |       |   |   |
| Oil ($/Bbl):            |       |                                              |       |   |   |
| Turkey                  |       | —                                            |       | $ | 49.79 |   |
| Gas ($/Mcf):            |       |                                              |       |   |   |
| Turkey                  |       | —                                            |       | $ | 8.64 |   |
| $/BOE:                  |       |                                              |       |   |   |
| Turkey                  |       | —                                            |       | $ | 50.94 |   |

 

***Other comprehensive income***

 

Themost significant element of comprehensive income, other than net income, isforeign currency translation. For the nine months  September 30, 2010, we had accumulatedan unrealized income of $0.7 million as compared to an unrealized loss of $4.3million for the comparable period in 2009.  This change is primarily dueto the weakening of the U.S. dollar compared to the Euro for the nine months September 30,2010 compared to the nine months September 30, 2009.

 

Thefunctional currency of our operations in France is the U.S. dollar. Thefunctional currency in Turkey and Hungary was the U.S. dollar. The exchangerates at September 30, 2010 and September 30, 2009 were:

 
| ** **       | ** ** | **September 30,** | ** ** |
|------------------|------------|------------------------|------------|
| ** **       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Euro             |       | $                      | 1.3648     |   | $ | 1.4643 |   |
| New Turkish Lira |       | —                 |       | $ | 0.0674 |   |
| Hungarian Forint |       | —                 |       | $ | 0.0054 |   |
|                  |            |                        |            |  |  |  |  |

 

**Off-balance sheet arrangements**

 

Wehave no off-balance sheet arrangements that have or are reasonably likely tohave a current or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

**ITEM 3.*  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

Therehave been no material changes in the Company’s market risk during the threemonths ended September 30, 2010. For additional information, refer to themarket risk disclosure in Item 7A as presented in the Company’s Annual Reporton Form 10-K, for the year ended December 31, 2009, which was filedwith the SEC on March 16, 2010.

 

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**ITEM 4.*  CONTROLS ANDPROCEDURES***

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) that aredesigned to provide reasonable assurance that the information required to bedisclosed by us in reports filed under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC.

 

Wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this quarterly report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures as of September 30, 2010 werenot effective due to the following material weakness identified in our AnnualReport on Form 10-K filed on March 16, 2010 and still in existencetoday:

 

·                  Ouraccounting and financial reporting procedures were not sufficiently designed toensure consistent and complete application of our accounting policies and toprepare financial statements in accordance with accounting principles generallyaccepted in the United States. This includes the lack of a sufficient review ofsensitive calculations, reconciliations and critical spreadsheets by personnelin key financial reporting positions.

 

Weare committed to improving our internal controls over financial reporting. Aspart of this commitment, the Company has reinforced during the third quarter of2010 the initial measures taken over the six first months of 2010 to strengthenthe control and review of sensitive calculations, reconciliations and criticalspreadsheets. During 2010, we have taken the following actions to date toaddress the material weakness:

 

·                  Hiredadditional staff, as well as increased external resources provided by ourindependent registered public accounting firm with respect to the financialconsolidation process, the preparation and review of sensitive calculations andspreadsheets.

 

·                  Implementedadditional review and reconciliation policies and procedures.  In addition, Deloitte Conseil is currentlyconducting a review of key accounting and financial reporting procedures and isexpected to propose necessary additional changes, if any, by the end of November 2010.

 

·                  Initiatedupgrade of certain accounting and consolidation software as well as implementedcertain software designed to assist in the preparation of annual and quarterlyreports.

 

The Company has also strengthened itsinternal control regarding contracts, guarantees and other commitmentsapproval.

 

Wewill continue to monitor and evaluate the effectiveness of our internalcontrols and procedures and our internal controls over financial reporting onan ongoing basis and are committed to taking further action and implementingadditional enhancements or improvements.

 

**Change in Internal Control over Financial Reporting**

 

Exceptas otherwise indicated above, there have been no changes in our internalcontrol over financial reporting during the quarter ended September 30,2010 that have materially affected or are reasonably likely to materiallyaffect our internal control over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

**ITEM 1.*  LEGALPROCEEDINGS***

 

See“Note 11 — Commitments and Contingencies,” which is incorporated into this “Item1. Legal Proceedings” by reference.

 

**ITEM 1A. *RISK FACTORS***

 

Therehave been no material changes to the risk factors previously discussed in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009, which was filed with the SEC on March 16, 2010.

 

**ITEM 2.  *UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS***

 

**Share Repurchase Program**

 

OnMay 27, 2010, the Board of Directors authorized a share repurchase programfor the repurchase of up to $5 million of shares of Toreador common stock inthe open market or in private transactions at the discretion of management overthe next 12 months.  The Company has no obligation to repurchase sharesunder the program, and the program may be suspended at any time.  As of September 30,2010, no shares of Toreador common stock have been repurchased pursuant to theshare repurchase program.

 

**ITEM 6.*  EXHIBITS***

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                            | ** ** | **Incorporation by Reference** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|
| 31.1                |       | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                             |       | Filed Herewith.                          |
|                |       |                                                                                                                                                                                       |       |                                     |
| 31.2                |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                             |       | Filed Herewith.                          |
|                |       |                                                                                                                                                                                       |       |                                     |
| 32.1                |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |       | Filed Herewith.                          |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Form 10-Q report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                  | TOREADOR RESOURCES CORPORATION        |
|-----------------------|---------------------------------------|
|                  |                                  |   |
|                  |                                  |   |
| November 9, 2010 | /s/ Craig M. McKenzie                 |   |
|                  |                                  |   |
|                  | Craig M. McKenzie                     |   |
|                  | President and Chief Executive Officer |   |
|                  |                                  |   |
| November 9, 2010 | /s/ Marc Sengès                  |   |
|                  |                                  |   |
|                  | Marc Sengès                      |   |
|                  | Chief Financial Officer               |   |

 

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